Mortgages

FHA loan: everything you need to know

If you’re wondering about the ins and outs of an FHA home loan, we’ve got what you need to make an informed decision. Learn more about this mortgage, including how to qualify and get approval.

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FHA loan: your ticket to homeownership

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Learn everything you need to know about FHA loans! Source: Adobe Stock

Are you doing some research about mortgages? Then you may have heard about an FHA loan. But what are they? How do they work? And are they right for you?

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This blog post will answer all your questions about FHA loans and help you decide if it’s the right fit for your need! Then keep reading to learn more!

How do FHA loans work?

A Federal Housing Administration (FHA) loan is a home loan backed by the government and issued by a lender or a bank. It has been helping people achieve homeownership since 1934.

The government ensures this home loan to protect the lender from any default on loan. It can be used to buy a house, refinance a mortgage or renovate a home.

One of the FHA loans’ main benefits is allowing borrowers to put less money down; as little as 3.5% might be enough to be eligible.

However, borrowers must pay FHA mortgage insurance if they put down less than 20% of the property price.

FHA usually comes with less strict qualification requirements FHA and in 15-year and 30-year fixed-rate terms.

It seems like FHA mortgages are of great help, right? Below, let’s check the main differences between an FHA loan and a regular one!

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What is the difference between an FHA loan and a regular loan?

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The difference between an FHA loan and a regular loan! Source: Adobe Stock

FHA loans were designed to help people to achieve homeownership more easily. Since it is insured by the Federal Housing Administration, as previously said, it offers less strict requirements and terms.

For example, while a conventional loan will offer 8 to 30-year terms, an FHA loan will allow borrowers to get between 15- and 30-year terms.

Also, when it comes to the interest types, with a regular mortgage, you can get a fixed or adjustable rate.

However, FHA loans offer only fixed-rate, which makes it easier to set up your budget since your monthly mortgage payments won’t change.

Additionally, FHA loans accept applicants with lower credit scores and deliver more flexible and lower down payments. Borrowers can qualify with low-to-moderate income, even with higher debt levels.

Nevertheless, FHA loans can only be used to finance a primary residence. On the other hand, a conventional loan can finance multiple types of property.

As you can see, FHA loans can be easier to qualify for than conventional ones. Also, borrowers can get better terms, rates, and conditions, which can be life-saver depending on their current finances.

FHA loan pros and cons

This mortgage loan is a great option for borrowers who cannot qualify for a loan with a private lender. As a result, it can be a good alternative to get the money you need to buy your dream home!

But before applying, you must compare all the details of this type of mortgage! After all, you don’t want to lose time and money! Below, let what the pros and cons of an FHA loan are.

Pros

  • Accepts borrowers with lower credit scores;
  • Delivers lower down payments;
  • The government backs FHA loans.

Cons

  • FHA loans can not be used for second homes or investment properties;
  • It usually delivers higher interest rates;
  • Not all properties will qualify for this type of loan;
  • FHA mortgage might potentially cost more.

What credit score do you need for an FHA loan?

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Find out how FHA loans work before applying! Source: Adobe Stock

FHA loans can greatly help borrowers with lower scores achieve homeownership. This type of mortgage has a minimum credit score requirement of 500.

However, the credit score will determine which down payment borrowers qualify for. For example, if you can make a down payment of 10% of the property value, you can qualify with a credit score of up to 579.

However, with a credit score of 580 or higher, borrowers can qualify for an FHA loan with a down payment of as little as 3.5% of the home price.

Who is eligible for an FHA loan?

As noted, FHA loans have less harsh eligibility requirements. Consequently, it is easier to qualify for them.

Potential borrowers don’t have to meet a particular income amount. However, they still must prove that they have a steady employment history for the last two years.

Also, homebuyers must have a debt-to-income ratio of no more than 43% and a variable income, which lenders can check through pay stubs, federal tax returns, and bank statements.

When applying, you might find that each lender might set some particular requirements. So you must check the eligibility of each one and see if you meet the criteria!

How to apply for an FHA loan?

Before applying, you need to find a lender that suits you best! In most cases, you can get preapproved without hurting your credit score!

In the prequalification process, lenders usually ask for a series of questions, such as name, contact information, income, how much of a down payment you can afford, and more!

This way, they can show you the best mortgage offer available.

Once you choose which offer you’ll get, it is time for you to submit the application and send the necessary documents.

Lenders usually request two years of tax returns, two recent pay stubs; ID; and full statements of your assets. So make you have these documents ready.

Shortly, the application for an FHA loan is very similar to other mortgage applications! So remember to check the particular requirements for the FHA loan in the lender you choose!

The application is as easy as it looks! After approval, you’ll be even closer to homeownership! Great, right?

Now that you know what is an FHA loan and how it works, are you ready to start your journey and buy your dream home? We hope so!

We have another great article to help you make an even more informed decision! So if you want to learn more about how mortgages work, keep reading!

We’re sure you will answer many of your questions in the next article!

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How do mortgages really work?

Having doubts about how mortgages work? Keep reading and find out all you need to know before financing a home purchase! Let’s get started!

About the author  /  Beatriz Vieira

Beatriz Vieira is a producer and copywriter who is part of the finance writer team in this portal. She has a degree in Journalism and aims to improve her bilingual writing skills. Her subjects of most significant interest are culture, finances, and self-development.

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