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The ABCs of FHA: What Is an FHA Loan?

by Byrne Anderson
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Over the next year, around 28 million Americans plan to buy a home. Are you part of that group? If so, then you’re probably already thinking ahead about the type of loan you’ll need. With a few different options available, it can be hard to know what the right choice is for you.

For example, what is an FHA loan? Is it something that you should consider? We’re here to help.

Keep reading to learn more about FHA loan criteria and whether you should get one when you go to buy a home.

What Is an FHA Loan?

A Federal Housing Administration (FHA) loan is insured by the FHA and can only be issued by an FHA-approved lender. FHA loans are ideal for low- or moderate-income buyers since these loans require a smaller down payment than other mortgage options.

The amount you can borrow with an FHA loan varies, but in 2020, it was 96.5% of the value of the loan. In that case, you’ll only need 3.5% of the sale price to put as a down payment. However, that can vary based on your credit score.

FHA loans come in 15-year and 30-year term options with fixed interest rates for the life of the loan. Read more here for additional information.

FHA Loan Requirements

So, how do you know if you qualify for an FHA loan? Here are the requirements you must meet:

  • Down payment of 3.5%, as long as your credit score is 580 or higher
  • Down payment of 10%, if your credit score is between 500 and 579
  • A debt-to-income ratio of less than 43%
  • Steady income and proof of employment
  • Use the home as your primary residence

When you choose an FHA loan, you can use money from your personal savings, a down payment assistance program, or a financial gift from a family member as your down payment.

Pros and Cons of an FHA Loan

One of the most attractive FHA loan benefits is that you don’t have to put as much money down. This gives you more freedom to buy a house when you otherwise wouldn’t be able to. Since you can also qualify for an FHA loan with a lower credit score, this makes homebuying more accessible as well.

Additionally, there are no income limits, meaning that even if you bring in a lot of money, an FHA loan is still available to you. Finally, you can use an FHA loan for a variety of housing options like single-family homes or multi-family homes with up to four units.

The downside of an FHA loan is that you have to pay higher mortgage insurance costs. With an FHA loan, you have to pay a monthly mortgage insurance premium as part of your monthly payment, unless you put down 20%. But, you can cancel that premium once you reach 20% equity in your home.

Consider an FHA Loan When You Buy a House

Now that you’ve read this quick guide and know how to answer the question, “what is an FHA loan?” you have a better understanding of your options when you go to buy a home.

Looking for more information like this? Browse through our other articles before you go!

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