FHA Loans Demystified: Key Facts and Benefits Explained

FHA loans help those with higher debt-to-income ratios or low incomes buy homes. Specific qualifications apply, and homebuyers must understand the application process to proceed with as few hiccups as possible. 

What Is an FHA Loan?

FHA stands for Federal Housing Administration. This type of loan is ideal for first-time homebuyers and has historically been a way for low-income borrowers to obtain homeownership. The United States government insures FHA loans and requires lower down payments than traditional mortgage lenders. Learn more about FHA loans before applying to ensure you meet the qualifications. 

FHA Qualifications for Borrowers

FHA guidelines can change occasionally, but the most recent include the following:

• Minimum FICO credit score of 500 or above (580 is the preferred score)
• Maximum loan amount of $331,760 (This amount can vary by state and county.)
• 15 or 30-year terms
• Income to debt ratio 43% or less
• 3.5% down payment
• Mortgage insurance (Paid upfront at 2.25% of the loan value)
• FHA-approved appraisal
• Home purchase must be the primary residence
• Proof of steady income

What Are the Benefits of FHA Loans?

FHA loans backed by the federal government offer many advantages over traditional mortgage loans, allowing more people to qualify for homeownership. The benefits to borrowers include the following:

Lower Credit Score Requirements

Some traditional mortgage lenders require borrowers to have credit scores of 700 or higher. FHA loans allow for more leniency with the FICO credit score. You can obtain approval with a score as low as 500. 

Higher Debt-to-Income Ratios

Lenders look at the amount of debt borrowers owe versus their income to determine the level of lending risk. Most traditional lenders want debt-to-income ratios of 36% or less. FHA lenders will accept borrowers with a 43% ratio.

Lower Interest Rates

Most borrowers seek FHA loans because of the less stringent requirements, but another advantage exists. FHA loans typically offer lower interest rates, which can save borrowers thousands over the life of their loans. 

Easier Refinancing Options

Refinancing is much easier with FHA loans than with traditional mortgage loans. The Federal Housing Administration offers the FHA Streamline Refinance program, which does not require income documentation, a minimum credit score, or an appraisal. Specific requirements apply, so speaking with an FHA lender regarding the details is essential. 

How to Apply for an FHA Loan

Applying for an FHA loan versus a traditional one is much less stressful for most borrowers. There are a few steps to securing one of these loans.

Meet All FHA Requirements

Reviewing the FHA requirements above and checking the government website for any changes is essential. Obtain all documentation to prepare for the application process to avoid delays. 

Seek Pre-Approval

Shop for multiple FHA lenders and seek pre-approval to understand the options. Compare the location, customer service, and other services the lenders offer.

Look for a Home

Begin shopping for a home as a primary residence. Remember that borrowers must move into the home within 60 days of loan closing. Get an FHA appraisal to ensure the house meets the FHA requirements. 

Finalize the Loan and Terms

Finalizing the loan terms is a critical step. You must sign all applicable documents and pay the closing costs. Closing an FHA loan can take 30 to 60 days.

FHA Loans Make Homeownership Attainable

Borrowers with less-than-perfect credit or higher debt-to-income ratios may want to consider an FHA loan to purchase a home for their primary residence. These loans offer more options and straightforward terms, making the homebuying process less stressful.