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FHA Loan: What You Need to Know

An FHA loan is a mortgage insured by the Federal Housing Administration. Allowing down payments as low as 3.5% with a 580 FICO, FHA loans are helpful for buyers with limited savings or lower credit scores. Whether you’re already sure an FHA loan is right for you or you’re still trying to figure out just what the FHA is, we’ve broken it all down. No need to wade through the FHA handbook; find answers to all your FHA FAQs right here.

 

What is an FHA loan?

An FHA loan is a mortgage insured by the Federal Housing Administration. With a minimum 3.5% down payment for borrowers with a credit score of 580 or higher, FHA loans are popular among first-time home buyers who have little savings or have credit challenges.

The FHA insures mortgages issued by lenders, like banks, credit unions and nonbanks. That insurance protects lenders in case of default, which is why FHA lenders are willing to offer favorable terms to borrowers who might not otherwise qualify for a home loan. Only an FHA-approved lender can issue an FHA-insured loan. An FHA home loan can be used to buy or refinance single-family houses, two- to four-unit multifamily homes, condominiums and certain manufactured homes. Specific types of FHA loans can also be used for new construction or for renovating an existing home.

 

What is the FHA?

The Federal Housing Administration — better known as the FHA — has been part of the U.S. Department of Housing and Urban Development since 1965. But the FHA actually began more than 30 years before that, as a component of the New Deal.

In addition to a stock market crash and the Dust Bowl drought, the Great Depression saw a housing market bubble burst. By early 1933, roughly half of American homeowners had defaulted on their mortgages.

The FHA was created as part of the National Housing Act of 1934 to stem the tide of foreclosures and help make homeownership more affordable. It established the 20% down payment as a new norm by insuring mortgages for up to 80% of a home’s value — previously, homeowners had been limited to borrowing 50%-60%. Today, the FHA insures loans for about 8 million single-family homes.

FHA Loan Limits

No matter which type of FHA loan you’re seeking, there will be limits on the mortgage amount. These limits vary by county. FHA loan limits in 2022 range from $420,860 to $970,800.

The upper limit for FHA loans on single-family homes in low-cost counties is $420,860. An example is Lucas County, Ohio, where Toledo is located. The upper limit for FHA loans in the highest-cost counties is $970,800 — San Francisco County, California, for example.

Some counties have housing prices that fall somewhere in between, so the FHA loan limits are in the middle, too. An example is Denver County, Colorado, where the 2022 FHA loan limit is $684,250. You can visit HUD’s website to find the FHA loan limit in any county.

 

How to Qualify for an FHA Loan

You’ll need to satisfy a number of requirements to qualify for an FHA loan. It’s important to note that these are the FHA’s minimum requirements and lenders may have additional stipulations. To make sure you get the best FHA mortgage rate and loan terms, shop more than one FHA-approved lender and compare offers.

 

What are the Pros and Cons of FHA Loans?

Even if your credit score and monthly budget leave you without other choices, be aware that FHA loans involve some trade-offs.

Benefits of FHA loans:

  • Lower minimum credit scores than conventional loans.

  • Down payments as low as 3.5%.

  • Debt-to-income ratios as high as 50% allowed.

Disadvantages of FHA loans:

  • FHA mortgage insurance lasts the full term of the loan with a down payment of less than 10%.

  • Property must meet strict health and safety standards.

  • No jumbo loans: The loan amount cannot exceed the conforming limit for the area.

Even though the FHA sets standard requirements, FHA-approved lenders’ requirements may be different.

 

 

Excerpt from original article by Kate Wood, Taylor Getler for Nerd

 

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