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What is an FHA Loan?

By Gretchen Wegrich Updated on 1/6/2014

FHA logo

An FHA loan is insured by the Federal Housing Administration. Since FHA guarantees to pay the balance in the event of a loan default, rather than the lender having to write it off, FHA loans are open to people with little to no credit history, poor credit history or to those who are unable to make large down payments. An FHA Loan can help you acquire a home with as little as 3.5%, instead of the high percentages required to obtain typical conventional financing. This allows a great advantage for first time home buyers or anyone who wants smaller down payments to buy a home.

What is the FHA?

The Federal Housing Administration was created in 1934 to combat the effects of the Great Depression by providing citizens with access to affordable loans, thus providing many Americans with the means to purchase a home. Since its initiation, the FHA has helped to finance over 34 million homes, and FHA loans remain popular today.

What are the qualifications for an FHA loan?

If you are pursuing an FHA loan, you must first be able to meet FHA requirements. and have your finances ready for the following:

  • Pay 3.5% down payment.
  • Pay 1.75% upfront insurance premium (can be added to the loan).
  • Show proof of 3 years of continuous income.
  • Show proof that you have paid all bills continuously for the past 3 years.
  • If you have filed for bankruptcy, it must be at least 2 years old and you must have since had a good credit standing (Chapter 7 - 2 years, Chapter 13 - 1 year).
  • If you've had a foreclosure or short sale, it must be at least 3 years old and you must have since had a good credit standing (certain programs allow for a purchase immediately after a short sale, and one year post foreclosure, but the guidelines are very specific).
  • Pay all title related costs (title search, title insurance, etc.).

To learn more about FHA requirements, please visit Lender411's comprehensive FHA Loan requirements page.

Who should get an FHA mortgage loan?

If you are unfamiliar with FHA loans or inexperienced with loans in general, an FHA loan might be the loan for you. Typically, loans secured by the Federal Housing Administration best fit first-time home buyers or borrowers with low to moderate income. Here are a few questions that you might ask yourself to determine whether or not an FHA loan is your optimal choice:

Have I had a steady income for the last two years?

  • When applying for an FHA loan, it is required you provide your lender with proof of two years of steady income. Tax returns, pay stubs, W2 and bank statements are required to obtain FHA financing. 

Do I have a low credit score?

  • FHA loans have low credit requirements, which enable many people with bad credit to secure loans. Even after filing for bankruptcy or undergoing a foreclosure, you may still have the necessary credit to qualify for an FHA loan, provided you have improved your credit standing since then.

Will I be able to put forward a large down payment?

  • If you are unable to afford putting down a large sum for a down payment, you should consider taking out an FHA mortgage loan. FHA loan down payments can be as low as 3.5%, which is lower than the 5% or higher down payment requirements for conventional mortgages. FHA allows the down payment to be "gifted" to you, usually from a family member, employer, or close family friend. There also might be some local grants or down payment assistance programs  (DPA) in your area. 

Will an FHA loan cover the cost of my potential home?

  • The Federal Housing Administration has separate loan limits for each county. If your potential residence costs more than the maximum limit for an FHA loan, you should consider alternatives.

Do I qualify?

  • Last but certainly not least, in order to even consider getting an FHA loan, you must first know whether or not you qualify. Make sure to get pre-approved before you start looking for your home. 
     

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About The Author:
Gretchen Wegrich
Gretchen Wegrich is an editor at Lender411. She specializes in mortgage basics, personal finance and green living. She graduated with a bachelor's degree in writing from University of California, San Diego and previously worked at the Santa Cruz Sentinel. Contact her at gretchen@lender411com.

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