What is an FHA home loan?

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Point of Interest

If you’re on the market for a mortgage loan, you may want to consider an FHA loan as one option. FHA loans are government-backed mortgages for homebuyers looking for a low down payment option with low interest rates.

FHA loans are just one of several options you have when shopping for a home mortgage. These types of loans are unique because they are insured by the Federal Housing Authority, which is part of the U.S. Department of Housing and Developing (HUD). Since these loans are government-backed, they typically come with lower rates and less stringent eligibility requirements for borrowers.

While there are some downsides to these types of loans — including extra mortgage insurance — FHA loans are designed to help more Americans become homeowners with easier credit approval and lower closing costs.

FHA home loans

FHA loans provide mortgages with lower down payment requirements and low interest rates. Borrowers who choose an FHA loan can qualify with a minimum down payment of just 3.5% in most cases, though it will depend on the lender. Conventional loans often require down payments between 10% and 20%, meaning FHA loans are a great alternative if you don’t have a huge down payment saved up.

But, while the FHA insures mortgages, it’s not a lender, so it does not actually offer FHA mortgage loans to borrowers. Potential borrowers must apply for an FHA loan through a private mortgage lender, such as a bank or credit union. Lenders that are FHA-approved offer a variety of fixed-rate or variable-rate loans, so borrowers will have options when it comes to term lengths and interest rate structures.

However, mortgage insurance is required on FHA loans even if you can put more than 20% down on the home. Unlike with private mortgage insurance for conventional loans, FHA loans require an upfront insurance premium of 1.75% of the loan amount. FHA loans also have annual premiums tacked on as well, which run, on average, between 0.45% to 1.05% of the loan amount. These added costs can impact whether an FHA loan is the best choice for many borrowers.

Who is eligible for an FHA home loan?

FHA loans are great for low-income or first-time buyers, but you don’t have to be a first-time homebuyer to apply. Annual income does not affect eligibility, so borrowers of any income level can get an FHA home loan. As long as you have a steady income, a minimum credit score of 580 and at least a 3.5% down payment saved up, an FHA loan is likely within reach.

There are limits to FHA loan amounts, though, which can vary by location. For 2020, FHA maximum loan amount limits fall between $331,760 in low- to medium-cost areas and $765,600 in higher-cost areas. Depending on where you live, the maximum loan amount will determine which homes you can buy and still be eligible for an FHA mortgage.

Pros and cons

Pros

  • Minimum down payment required is only 3.5% 
  • Minimum credit score required is only 580

Cons

  • Mortgage insurance premiums are required  
  • FHA loan limits may set your house shopping budget for you

The final word

FHA mortgages are ideal for first-time or low-income buyers who don’t have a significant down payment saved up. FHA loans have clear requirements and guidelines to help borrowers get approved easily, even with lower credit scores. Though borrowers may have to pay extra mortgage insurance premiums, FHA loans may still be a great option compared to most conventional mortgages when comparing overall costs and interest rates.

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Rayna Perry

Personal Finance Copywriter

Rayna Perry is a Personal Finance Copywriter at Interest.com and a Public Relations major at the University of Georgia. When not writing about personal finance, she is usually watching a great movie or creating a new playlist.