Everything to Know About an FHA Loan: Benefits, Tips and More

Last week we did a deep dive into conventional loans. Today, we’re covering everything to know about an FHA loan. For many first-time homebuyers, FHA loans open the door to homeownership. Insured by the Federal Housing Administration, FHA loans are designed to help buyers with moderate incomes or lower credit scores buy a home with affordable down payments. 

What Is an FHA Loan?

An FHA loan is a government-backed mortgage designed to help make homeownership more accessible. It allows for lower down payments and more flexible credit requirements, making it a great option for those who may not qualify for conventional loans.

Key Requirements

• Credit Score: FHA loans require a minimum score of 580 for a 3.5% down payment. Buyers with scores between 500-579 may still qualify with a 10% down payment.
• Down Payment: FHA loans allow a minimum down payment of 3.5%, which can come from gifts, grants or savings.
• Debt-to-Income Ratio (DTI): Typically, FHA loans allow a DTI ratio up to 43-50%.
• Mortgage Insurance Premium (MIP): FHA loans require an upfront MIP and an annual MIP, which stays for the life of the loan if your down payment is below 10%.

Pros and Cons of FHA Loans

Pros:

• Lower Down Payment Options: With a down payment as low as 3.5%, FHA loans are great for buyers with limited savings.
• Flexible Credit Requirements: FHA loans are more accessible for buyers with lower credit scores or shorter credit histories.
• Gift Funds Allowed: Down payments can be fully or partially funded by gifts from family or friends.

Cons:

• MIP for the Life of the Loan: MIP is required for the life of the loan if your down payment is below 10%.
• Primary Residence Only: FHA loans are limited to primary residences, so they aren’t an option for investment properties.

Ideal Candidates for FHA Loans

FHA loans are ideal for first-time homebuyers or those with lower credit scores who need a low down payment. They’re also beneficial for buyers who receive financial assistance from family members.

Application Process

1. Pre-Approval: Similar to a conventional loan, you’ll need to get pre-approved by providing income and credit information.
2. Submit Documentation: Collect income statements, tax returns and employment history.
3. Underwriting & FHA Appraisal: The lender orders an appraisal to confirm the property meets FHA guidelines.
4. Closing: Once approved, you’ll sign the final paperwork to close on your loan.

FHA loans make homeownership achievable for many buyers who might not qualify for conventional loans. Talk with a lender about FHA options (our KC preferred vendor is Meggan McDonald with Supreme Lending) about your options to see if an FHA loan is the best fit. If this blog still hasn’t given you everything to know about an FHA loan, you can also reach out to your realtor to help you walk through the options.