FHA loan
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What is fha loan?
An FHA loan is a mortgage insured by the Federal Housing Administration, part of HUD. Because of that insurance, lenders accept a smaller down payment and a lower credit score than most conventional loans allow.
FHA loan questions
- What is an FHA loan?
- It is a home loan made by a private lender and insured by the Federal Housing Administration. Because FHA covers the lender's loss if you default, lenders accept smaller down payments and lower credit scores than on most conventional loans.
- What are the requirements for an FHA loan?
- You need a credit score of at least 500, a down payment of 3.5% with a score of 580 or more or 10% below that, steady income the lender can verify, and a home you will live in that passes an FHA appraisal.
- How much down payment do you need for an FHA loan?
- The minimum is 3.5% of the price if your credit score is 580 or higher, and 10% if it is between 500 and 579. The down payment can come from savings or, within HUD's rules, a gift from family.
- Is an FHA loan better than a conventional loan?
- It depends on your credit and down payment. FHA is easier to qualify for, but its mortgage insurance often lasts the life of the loan, while conventional PMI can be removed once you have about 20% equity, so strong borrowers often pay less with a conventional loan.
What it means in practice
A bank or other approved lender makes the loan, and FHA insures the lender against default. The borrower pays for that cover through mortgage insurance premiums, and it is why the rules are looser: under HUD Handbook 4000.1, a credit score of 580 or higher can qualify with 3.5% down, and a score from 500 to 579 needs 10% down.
You pay for the insurance twice: an upfront premium, usually added to the loan, and an annual premium spread across your monthly payments. With less than 10% down, the annual premium lasts for the life of the loan. With 10% or more down, it ends after 11 years. Conventional PMI can be cancelled once you build enough equity.
FHA loans are for a home you will live in, and HUD caps the amount you can borrow with a county loan limit it sets each year. Many borrowers start with FHA and refinance into a conventional loan once their equity passes 20%, mainly to drop the insurance. To see what the premium adds to your payment, enter it as mortgage insurance in the mortgage calculator.