What is an FHA loan?
An FHA loan is a mortgage insured by the Federal Housing Administration. Borrowers with FHA loans pay for mortgage insurance, which protects the lender from a loss if the borrower defaults on the loan.
Benefits of FHA Loans: Low Down Payments and Less Strict Credit Score Requirements
Typically an FHA loan is one of the easiest types of mortgage loans to qualify for because it requires a low down payment and you can have less-than-perfect credit. For FHA loans, down payment of 3.5 percent is required for maximum financing. Borrowers with credit scores as low as 500 can qualify for an FHA loan.
Borrowers who cannot afford a 20 percent down payment, have a lower credit score, or can’t get approved for private mortgage insurance should look into whether an FHA loan is the best option for their personal scenario.
Another advantage of an FHA loan it is an assumable mortgage which means if you want to sell your home, the buyer can “assume” the loan you have. People who have low or bad credit, have undergone a bankruptcy or have been foreclosed upon may be able to still qualify for an FHA loan.
Why people get FHA loans
Because of that insurance, lenders can -- and do -- offer FHA loans at attractive interest rates and with less stringent and more flexible qualification requirements. The FHA is an agency within the U.S. Department of Housing and Urban Development.
Here are four facts that borrowers should know about FHA loans.
1) Minimum credit scores for FHA loans depend on the type of loan the borrower needs. To get a mortgage with a down payment as low as 3.5 percent, the borrower needs a credit score of 600 or higher.
2) FHA borrowers can use their own savings to make the down payment. But other allowed sources of down payment include a gift from a family member or from a 401K account.
3) The FHA allows home sellers, builders and lenders to pay some of the borrower's closing costs, such as an appraisal, credit report or title expenses.
4) The FHA has a special loan product for borrowers who need extra cash to make repairs to their homes. The chief advantage of this type of loan, called a 203(k), is that the loan amount is not based on the current appraised value of the home, but on the projected value after the repairs are completed.
A so-called "streamlined" 203(k) allows the borrower to finance up to $35,000 for nonstructural repairs, such as painting and replacing cabinets or fixtures.