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There are several different types of loans available to help you secure a mortgage loan. Each loan type comes with its own set of loan terms and requirements. The FHA loan is one type of mortgage loan that works well for home buyers who might have limited or less-than-perfect credit and a limited amount of cash savings available for a down payment. Some borrowers can even get approved with a bankruptcy on their credit report. FHA loans are backed by the federal government, meaning that if the borrower defaults, the government protects the lender against the loss.
What Is an FHA Loan?
An FHA is a mortgage loan backed by the Federal Housing Administration (FHA), a government agency that falls under the Department of Housing and Urban Development’s jurisdiction. Though the government backs FHA loans, they are secured through local financial institutions, like banks, credit unions, and mortgage-focused lenders. FHA loans tend to have approval requirements that make it easier to secure the loan compared to other types of mortgage loans.
FHA Loan Approval Requirements
Borrowers can often get approved for an FHA loan with a lower credit score and less-than-perfect credit compared to what’s required for other mortgage loans. It’s also possible to secure a loan with as little as a 3.5% down payment.
Down Payment and Credit Score: With a down payment of 3.5%, a borrower has to have a minimum of a 580 credit score. With a 10% down payment, credit score requirements range between 500 and 579.
Credit Record: Aside from the minimum credit score, if someone has a Chapter 7 bankruptcy on their credit report, the discharge date must be two years prior to the mortgage loan application. For those with a Chapter 13 bankruptcy, the discharge date must be at least 12 months prior to the mortgage loan application, with a minimum of 12 bankruptcy payments made on time and a letter from the bankruptcy court giving permission for you to apply for a mortgage loan.
Debt to Income Ratio (DTI): FHA loans don’t have a minimum income requirement. However, they do require that you’re able to prove that you have a steady employment history. Income is verified through W-2s, pay stubs, bank statements, or federal tax returns, as dictated by your lender. Other types of employment verification might also be requested.
Mortgage Insurance Requirement
Due to the low down payment amount, mortgage insurance is required to be purchased for the life of an FHA loan. The exception is if you put down a minimum of 10%. In this case, the mortgage insurance will continue for the first ten years of the loan and will be dropped after 11 years.
Types of FHA Loans
It’s possible to get an FHA loan with a fixed or variable interest rate. Below are the types of loans you might be able to secure under the FHA umbrella.
FHA New Home Purchase
You can secure an FHA loan to purchase a new home that qualifies as your primary residence. It’s possible to secure this type of loan with as little as a 3.5% down payment and a minimum 580 FICO score.
FHA Refinance Loans
If you’re interested in lowering your interest rate, even if your credit has some blemishes, an FHA rate/term refinance might be an option for you. The approval requirements are similar to those of a new home loan.
FHA Cash-Out Refinance
A cash-out refinance loan allows you to receive the cash for the equity in your home. You can use the funds towards things like home improvement costs, debt consolidation, or paying down credit cards.
FHA Streamline Loan
An FHA Streamline loan is for those that already have an FHA loan and are interested in a rate or term refinance. If you already have an FHA loan, you’ll receive some extra benefits through a Streamline refinance loan, including reduced documentation and appraisal requirements and limited employment verification.
FHA 203(k) Loan
A 203(k) loan allows you to purchase a home and make renovations with the same loan. Projects that a 203(k) loan can cover include home modernization improvements, replacing old flooring, replacing roofing, updating plumbing, and making homes accessible for the disabled.
FHA Loan Interest Rates
Since FHA loans are backed by the government, it helps to mitigate a lender’s risks associated with the loan. As a result, lenders can offer FHA interest rates that are comparable to conventional loan interest rates.
Your specific interest rate will be determined based on the current market, your credit score, down payment, DTI, and other factors as established by the lender.
Searching for an FHA Loan
Different lenders offer different loan types and loan terms. The best thing you can do when looking for a home loan is to do your research and shop around to determine what your approval odds are and what rates different lenders offer. Then you can make an educated choice on what your best path forward is.