An FHA loan provides a government-insured loan with flexible loan options. Even experienced homeowners may need to plan for a long time for a new home purchase. Fortunately, FHA loans may help some buyers get into the home of their dreams with a lower down payment.

What is an FHA loan?

FHA loans are mortgages backed by the U.S. Federal Housing Administration. Lenders, such as banks and credit unions, that provide FHA loans provide funding for home purchases while requiring a lower down payment. Buyers may get into a new home with as little as 3.5% down.

Using conventional loans, a lower down payment requires the borrower to obtain private mortgage insurance (PMI). This special type of insurance protects only the lender in the case the borrower is unable to make timely payments resulting in default. FHA loans, on the other hand, do not require PMI because they are backed by the U.S. government. Instead, FHA charges a mortgage insurance premium (MIP) upfront and added to the monthly payment. For FHA loans with a 10% or higher down payment the monthly MIP will be cancelled after 11 years. If the down payment on the loan was less than 10%, the monthly MIP will continue for the duration of the loan.  Additional scrutiny is often required during the loan application process using an FHA loan.

What is required for an FHA loan?

Many of the same documents are required for an FHA loan that any potential lender will want to see: employment history, appraisal, debt-to-income ration. A few additional stipulations are also attached to the FHA loan process. Buyers may have to bring 3.5% of the purchase price as a down payment, more if they have a credit score below 580. FHA loans are only available for the borrower’s primary residence.

Credit requirements may also be lower for FHA loans, given other factors demonstrate that the borrower is able to manage their money responsibly. Each lender looks at individual applications and may ask for additional documentation or explanations. They are often able to work with buyers with a lower credit score or shorter credit history than in other situations.

How FHA Loans Work

• Purchase your home with as little as 3.5% down payment (compared to 20% required on most loans).
• 30-, 25-, 20- and 15-year terms are all available with fixed rates.
• Pay your mortgage off at any time without pre-payment penalties.

Have questions?  Give us a call!  One of our mortgage specialists would be happy to answer all of your questions.

**Borrow Smart Mortgage, Inc. is not affiliated with or acting on behalf of or at the direction of FHA, VA, USDA or the Federal Government.