Thinking of buying a new home? FHA home loans are a great government-backed mortgage option for servicemembers and civilians alike. These loans can require a down payment as low as 3.5% of the appraised home value and might allow a credit score as low as 580, although it may vary by lender. Because they’re an affordable option, FHA loans are an excellent choice for many first-time homebuyers, especially those with little savings or who are struggling with credit issues. However, the lower the credit score, the higher the interest rate and required down payment.
What Is an FHA Home Loan?
An FHA loan is a type of mortgage that is backed by the Federal Housing Administration (FHA). Because the FHA insures the mortgage — meaning they will cover the loan in case of a default — the loan is less risky for lenders. Therefore, lenders can accept lower down payments (as little as 3.5% with minimum 580 credit score) and are more willing to loan money to people with lower credit scores. As with any mortgage loan, you’ll repay the loan through your monthly FHA mortgage payment, however, your monthly payments will include an annual Mortgage Insurance Premium (MIP), unless you pay that MIP upfront.
How Can an FHA Mortgage Loan Be Used?
FHA loans can be used to purchase or refinance a single-family home, condominium, as well as a multi-family unit up to four units. Some loans can also be used for new construction or home renovations, including energy-efficient upgrades. Each of these types of loans has limits. Here are some examples:
- Basic home mortgages must be on a house that only requires $5,000 or less in repairs.
- Construction loans can be used to purchase land and build a new home, but the qualification process is more difficult and takes a little longer.
All FHA loans have mortgage limits based on the county in which you live. For example, limits for 2021 ranged from $356,362 for low-cost counties, to $822,375 in the highest-cost counties on one-unit properties. Additionally, a property must meet FHA loan requirements, which include an assessment and an FHA inspection.