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What is an FHA Loan?

FHA loans are mortgages backed by the government and insured by the Federal Housing Administration (FHA). FHA loans typically require lower minimum down payments and credit scores than other types of loans because FHA insurance protects the mortgage lenders, making them popular among first-time homebuyers. This means that a borrower can make a down payment on their home with as little as 3.5% down with an FHA loan.

What is required for an FHA loan?

There are a variety of requirements to qualify for an FHA mortgage loan. A 3.5% down payment is required if your credit score is 580 or more, with a higher down payment required if your score is 579 or lower. Debt-to-income (DTI) factor is also a determining factor in one’s qualification for an FHA mortgage loan. FHA lenders typically want borrowers to have a DTI of 43% or less upon applying. An FHA loan will also require a mortgage insurance premium (MIP) that will protect lenders against potential losses in the event that the borrower defaults.

An individual will only be able to apply for an FHA loan if the home will be their primary residence and they have not had a foreclosure within the past three years. Employment history will also play a role in the ability to apply for an FHA loan, with most lenders wanting to see at least two years of continuous employment. While there are a few requirements to qualify for an FHA home loan, they are typically less strict than more traditional mortgage loans.

Benefits of FHA Loans

Down payments as low as 3.5%, easier credit qualifications, higher DTI, and backing by FHA insurance are commonly cited benefits for FHA home loans, but there are many other factors that set these loans apart. FHA mortgages can be used to purchase properties with up to four units, giving borrowers more flexibility. You can occupy one or more units and rent out the others. FHA loans also do not have early payoff penalties for borrowers refinancing their loan.

FHA loans are available with both adjustable-rate and fixed mortgages and often feature competitive rates and flexible loan terms. Interest rates on FHA mortgages are typically lower than conventional loan interest rates. This is because FHA loans are backed by the Federal Housing Administration.

An added benefit of FHA loans is that they can be tailored for situations such as construction. An FHA construction loan helps borrowers buy land, build a house from the ground up, and finance their mortgage via one loan. An FHA construction loan can also be used for remodels and home upgrades. Like a traditional FHA home loan, an FHA construction loan has a low down payment and credit score requirement.

How FHA Loans Work

Borrowers can purchase a home with as little as 3.5% down, which is much lower than the 20% that is typically required for more traditional loans. FHA loans feature several terms at fixed rates including 15, 20, 25, and 30-year terms. A 5-year adjustable-rate mortgage is available as well. Because of the protections in place with FHA loans, borrowers can pay off their mortgages at any time without penalty.

If you have any questions about FHA loans, FHA interest rates, how to apply for an FHA loan, or their benefits, give us a call!  Our FHA mortgage specialists would be happy to answer any questions you may have about FHA mortgages.

**Thompson Kane & Company is not affiliated with or acting on behalf of or at the direction of the FHA, VA, USDA, or the Federal Government.

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