What is an FHA loan?

Real Estate in 2020
December 19, 2019

What is an FHA loan?

If you’re a first-time homebuyer, you may feel like finding the right loan for you can be difficult. Luckily, FHA loans are a great option for those purchasing a home for the first time. An FHA loan is a type of loan that is insured by the Federal Housing Administration, or FHA for short. These loans usually have more lenient requirements than others, including lower required credit scores and minimum down payments. If you may interested in an FHA loan, read on to learn more about how they work and who qualifies.

FHA loans are great for those who don’t have large cash savings. Those who decide to take out an FHA loan do, however, have to pay for FHA mortgage insurance. So, if the borrower stops paying the mortgage, the lender is protected by this insurance. On the other hand, the borrower is not protected by this insurance. If the home goes into foreclosure, the lender is able to file a claim with the FHA to receive payment for the remainder of the loan. Because this insurance is available to lenders, they are more inclined to approve FHA loans for those with low credit or small down payments.

FHA loans are different than conventional mortgages for reasons other than purchasing additional insurance. These loans usually have lower interest rates than loans from traditional mortgage loans. FHA loans also allow a greater portion of the down payment to come from a gift or assistance, whereas non-FHA loans often restrict the percentage of a down payment that can come from gifts. 

FHA loans are an excellent choice for those with a credit score of at least 580 (in some cases, a lower credit score may be accepted) and a down payment of at least 3.5% (although a higher down payment is always preferred). The buyer should be purchasing, renovating, or refinancing a home with the intention of making it their primary residence. A stable income with proof of employment is also necessary for approval. This basic and accessible criteria are what make FHA loans so popular for many homebuyers.

Ultimately, FHA loans are very good for those with low or no credit or down payment. The lower interest rates mean that the loan will cost less over time, and the additional FHA insurance makes lenders more inclined to provide these loans to borrowers. If you are a first time homebuyer or thinking about refinancing your home, consider an FHA loan.

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