Understanding FHA Loans

Last Updated 4/13/2015

An FHA loan is a mortgage loan that is guaranteed by the Federal Housing Authority, a government agency in the US Department of Housing and Urban Development. The FHA insures the loans to reduce the amount of risk private lenders assume in issuing the loans. The goal of the Federal Housing Authority and FHA loans are to make home ownership accessible and affordable to those who don’t qualify for traditional loans. It stimulates the housing and real estate markets by placing more buyers and homeowners in the market.

Qualifying for an FHA Loan

FHA loans have different qualifications for borrowers than other conventional mortgages. The minimum credit scores for FHA loans vary by the amount of downpayment being made. A borrower making a 3.5% down payment will need to have a credit score of 580 or higher and a borrower making a down payment of 10% can have a credit score as low as 500. The FHA also accepts non-traditional credit for applicants who have insufficient credit history.

Down Payment Requirements

FHA loans require a minimum down payment of 3.5% of the purchase price of the home. The down payment can be from the borrower’s own money, a gift from a friend or family member, or a grant from a local to state government down payment assistance program.

Mortgage Insurance

All FHA loans above 80 percent loan to value require mortgage insurance. Since FHA loans don’t have the strict qualifying standards of conventional loans, they use mortgage insurance to offset the risk of the loans. FHA loans require two different types of mortgage insurance: an upfront mortgage insurance premium and an annual mortgage insurance premium.

The upfront mortgage insurance premium must be paid at the time of closing. It can either be paid upfront or be added to the loan balance. The amount of the premium is a percentage of the overall loan balance. The premium ranges around 1-2% of the loan balance.

The annual mortgage insurance premium is an amount that is paid each year, but is divided into monthly payments that is added to the mortgage payment. The amount of the annual insurance premium is based on the loan to value ratio, the amount of the loan and the length of the loan.

FHA Loan Limits

There are loan limits that apply to FHA Loans. The FHA follows the maximum mortgage limits that are put in place by the Department of Housing and Urban Development. These limits vary by county and you can access the loan limits here at the HUD website.