What Is Fha Loan : What Is An FHA Loan?

what is fha loan: f you’re starting out on the home buying journey, you might have heard of FHA loans, but what does “FHA” stand for and why should you consider this type of loan? A Federal Housing Administration (FHA) loan might be a good option if you have debt or a lower credit score. You might even be able to get an FHA loan with a bankruptcy or other financial issue on your record.

Let’s take a closer look at FHA home loans, their requirements and whether an FHA loan might be right for you.

What Is An FHA Loan?

FHA loans are backed by the Federal Housing Administration, an agency under the jurisdiction of the U.S. Department of Housing and Urban Development (HUD). FHA loans are insured by the FHA, which simply means that the owners of your mortgage are protected against loss if you default on your loan.

How Do FHA Loans Work?

FHA loans allow home buyers to borrow up to a certain percentage of a home’s value, depending on their credit score. Home buyers with a credit score at or above 580 can borrow up to 96.5% of a home’s value. While borrowers with credit scores of 500 – 579 may still qualify for an FHA loan with a 10% down payment, many lenders have their own minimum credit score requirements. Rocket Mortgage® requires a minimum credit score of 580 for FHA loans.

While FHA loans are available with low down payment options and a lower minimum credit score than most other types of home loans, you’ll have to pay a mortgage insurance premium.

FHA loan down payment Credit Score, Maximum Amounts And Down Payments For FHA Loans

Credit Score	Maximum Loan Amount	Minimum Down Payment
580+	96.5% of home value	3.5% of purchase price
500 – 579	90% of home value	10% of purchase price

Why Are FHA Loans Attractive?

Low down payment and lenient credit score requirements often make FHA loans attractive for home buyers, especially first-time home buyers.

Here are some benefits of FHA loans:

• Credit score requirements are low compared to most other loans.
• Your lender can accept a low down payment.
• Qualifying for an FHA loan can still be possible even if you have a bankruptcy or other financial issues in your financial history.
• FHA closing costs can often be rolled into your loan.

FHA loan requirements

Borrowers must meet certain requirements to qualify for an FHA loan. For example:

• The home you consider must be appraised by an FHA-approved appraiser.
• You can only get a new FHA loan for your primary residence, which means it can’t be an investment property or second home.
• You must occupy the property within 60 days of closing.
• The loan requires an inspection, and the inspection must report whether it meets minimum property standards.

There are a few more specific conditions to qualify, including a down payment amount, mortgage insurance, credit score, loan limits and income requirements. We’ll explore these conditions in more depth below.

FHA Loan Down Payments

Your down payment is a percentage of the purchase price of a home and is the amount you put down for that home. The minimum down payment you’re required to make on an FHA loan is directly linked to your credit score. Your credit score is a number ranging from 300 – 850 that’s used to indicate your creditworthiness.

An FHA loan requires a minimum 3.5% down payment for credit scores of 580 and higher. If you can make a 10% down payment, your credit score can be in the 500 – 579 range. Rocket Mortgage® requires a minimum credit score of 580 for FHA loans. A mortgage calculator can help you estimate your monthly payments, and you can also see how your down payment amount affects them.

Note that cash down payments can be made with gift assistance for an FHA loan, but they must be well-documented to ensure the assistance is truly a gift and not a loan in disguise.

FHA Loans Credit Score

Several factors determine your credit score, including:

• The type of credit you have (credit cards, loans, etc.)
• Credit utilization, which is how much credit you use
• Whether you pay your bills on time
• The amount you owe on your credit cards
• How much new and recent credit you’ve taken on

FHA Income Requirements

Your eligibility for an FHA loan doesn’t hinge on a particular income amount, but you must prove you have a steady employment history. Your income must be verifiable by sharing pay stubs, W-2s, federal tax returns and bank statements with your lender. Your lender may ask for other examples of verification as well.

FHA Loan Limits

There’s a maximum limit to what you can borrow for an FHA loan, depending on the county the home is in.

According to HUD, the maximum FHA lending amount for high-cost areas (such as large metropolitan areas) is $1,149,825 for 2024. In lower-cost areas, the FHA limits are based on county, but generally, for one-unit properties the 2024 limit is $498,257. If you have multiple units, limits may be higher.

You can look up the FHA mortgage limits for one or more areas on the FHA mortgage limits page. The page also includes a median sale price value for each area. Those are the median price estimates used for loan limit determination, according to HUD.

FHA Interest Rates

FHA interest rates can be competitive compared to conventional mortgage rates. This is because the government-backing allows lenders to offer you a lower rate. The rate depends on several factors, including national mortgage interest rates, your income and credit score, the amount you plan to borrow, your down payment amount and your DTI.

Types Of FHA Home Loans

There are several types of FHA loans. The type you choose limits the type of home you can buy and how you can spend the money you receive. This makes it especially important to be sure you’re getting the right type of loan. If none of the loan types discussed next match your goals, you might want to consider another type of government loan.

When purchasing a home, you can put as little as 3.5% down if you have a median FICO® Score of 580. If you have a score that low, you’ll need to keep an equally low DTI. Rocket Mortgage requires a ratio of no more than 38% before your mortgage payment is included, and no more than 45% once it’s included.

If your median FICO® Score is 620 or higher, you may be able to qualify with a higher DTI. In no event will your DTI be able to rise above 57%.

At Rocket Mortgage, you can purchase up to a two-unit property with an FHA loan.

the differences between conventional and FHA loans: FHA loan vs conventional

A conventional loan is a common alternative to an FHA loan. Though conventional mortgages have stricter requirements, broadly speaking, they typically come with similar interest rates and more flexible mortgage insurance (that ends when you reach 20% home equity), which is why borrowers often consider refinancing their FHA loan to a conventional loan.

Let’s take a closer look at some of the differences between conventional and FHA loans:

FHA Loan FAQs

How do I apply for an FHA loan?FHA loan application online

Once you choose the mortgage lender you’d like to work with, you can apply for an FHA loan. After you provide all of the necessary documents (tax returns, pay stubs, bank statements, etc.) to your lender, they’ll submit your application and work on a loan estimate.

Who qualifies for an FHA loan?

As with every loan, borrowers must meet certain requirements to qualify for an FHA loan. Borrowers must prove they have a steady employment history by showing pay stubs, W-2s, federal tax returns and bank statements. In addition:

• The home must be appraised by an FHA-approved appraiser.
• The home has to be a primary residence.
• You must occupy the property within 60 days of closing.
• An FHA inspection is required, and the inspection must report whether the property meets minimum property standards.

You’ll also need to make a down payment, pay mortgage insurance and have a minimum credit score.

 

What is an FHA loan?