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What is an FHA Home Loan?

An FHA loan is a mortgage that is insured by the Federal Housing Administration (FHA), which is an agency within the U. S. Department of Housing and Urban Development (HUD). Borrowers with FHA loans pay for their own mortgage insurance. This insurance protects the lender from loss if the borrower defaults on a the loan. Because the loan is insured, FHA loans can be offered at attractive insurance rates and with more flexible qualification requirements. 

Credit Scores
Minimum credit scores depend on the type of loan that the borrower needs. A higher credit score of 580 is needed to get a mortgage with a low down payment of 3.5%. Borrowers with credit scores between 500 and 574 will need provide a down payment of at least 10%. Borrowers with credit scored under 500 are usually ineligible for FHA loans, although exceptions are made for people with nontradtional credit history or insufficient credit if they meet all the other requirements. 

Down Payments
FHA borrowers can use their own savings to provide a down payment.  Other sources of cash can also include a gift from a family member or a grant from a state of local government as part of a down-payment assistance program. 

Closing Costs
Some closig costs can be covered by the home sellers, the builders, and the lenders such as title expenses, the appraisal, or the credit report. Sometimes homebuilders pay the clsoing costs in order to make a new home purchase more attractive to the borrower. If lenders pay for the clsing costs, they generally charge a higher interest rate on the loan. It is always beneficial to the borrower to compare loan estimates from different lenders.

FHA-Approved Lenders
Not all lenders provide FHA loans and not all FHA-approved lenders offer the same interest rates and costs. Underwriting, costs, and services will vary between lenders and brokers, so do shop around before making a decision. 

Two-Part FHA Mortgage Insurance
In order to offer lower rates and less stringent credit requirements, FHA loans require the borrower to pay mortgage insurance. The upfront premium is 1.75% of the loan amount.  For example, a loan of $100,000 will require a $1,750 upfront premium. The second part of the FHA mortgage insurance is an annual premium that is paid monthly. The premium amount varies depending on the length of the loan, the amount borrowed, and the initial loan-to-value rate.

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