FINANCIAL ADVICE | BUYING A HOME
What are FHA Loans?
Published February 7, 2019
- Americans can buy a house with only 3.5 % down.
- To get that 3.5% down payment, you have to have a minimum credit score of 580..VA loans are issued through the Department of Veteran Affairs and are similar to FHA loans
FHA Loans are simply mortgage loans insured by the government through the Federal Housing Administration (FHA). They typically offer low down payments on a home mortgage to those that qualify.
What is the FHA?
The FHA is the acronym for the Federal Housing Administration, which was created back in the 1930s to help Americans who were hurt by the Great Depression. The FHA was part of Franklin Roosevelt’s New Deal, and it shaped our current mortgage system. The FHA has insured over 35 million homes since its creation and currently insures 4.8 million single-family homes in the United States.
What makes FHA loans so special?
The draw to these government loans is the low down payment allowed by an FHA loan. Americans can buy a house with only 3.5 % down, and that’s very appealing to first time homebuyers. However, that low down payment comes with certain requirements attached to it.
What do I need to qualify for an FHA loan?
To get that 3.5% down payment, you have to have a minimum credit score of 580. You may be asking, “What if my credit score isn’t that stellar?” The FHA does allow scores between 500 and 579, but the caveat is that you have to put down at least 10% with FICO scores that low. There are other requirements as well, such as a steady income, a mandatory government-approved home appraisal, a low back-end ratio, and a few other things. Check out our article on FHA requirements to learn more.
Do I have to pay mortgage insurance?
The other thing you need to be aware of is the Mortgage Insurance Premium or MIP that you will have to pay every month with an FHA loan. This insurance protects the government if you ever get into financial trouble. The way this works is you pay a one-time premium at closing (1.75% of your loan) and then subsequently you pay a monthly premium most likely for the life of the loan. If you put 10% down, then it lasts for only 11 years. On the upside, a monthly mortgage insurance premium is usually less than the PMI or Private Mortgage Insurance monthly payment that you may have on a conventional loan. There are ways out of this, like refinancing your loan at a later time into a conventional one.
What is the difference between conventional, VA, and FHA loans?
A conventional loan is issued by private insurance companies and is the most popular type of mortgage loan. On loans with less than 20% down, mortgage insurance may be applied to this type of loan but can be removed after a few benchmarks have been met.
FHA loans, we’ve already been over, but there are other types of government loans that you may consider as well. If you or a family member have served or are currently serving in the military, then you may qualify for a VA loan. VA loans are issued through the Department of Veteran Affairs and are similar to FHA loans with the primary advantage of not putting any money down--that’s right 100% financing for the purchase of a home!
What is the difference between fixed and adjustable rate loans?
You are going to have to choose what type of loan that’s best for you. There’s fixed-rate loans and adjustable rate loans. The most common type of FHA loan is a 30-year fixed-rate mortgage. A fixed-rate loan has the same interest rate for the duration of the loan. The other type of loan is an adjustable-rate mortgage or ARM, which will change over time. Depending on national interest rates, the interest rate on an ARM will either increase or decrease. It’s a gamble, but you can save a lot of money in times of low interest rates. Although, adjustable-rate mortgages could bite you in the end if interest rates rise.
How do I begin the FHA application process?
If you have steady employment, a 580 or better FICO score, and want to buy a home that doesn’t exceed the FHA loan limit (check the limits here), you are probably ready to apply.
The next step is to get pre-approved with an FHA lender of your choice, such as Credit Union of Texas. FHA loans are government issued, but they are managed by your local bank, credit union, or any number of national online mortgage lenders. You may even check with an independent mortgage broker as well. Don’t be afraid to get out there and get quotes from a few lenders to see what they'll offer you.