NEHM Blog

What is an FHA Loan?

August 22, 2018
Author: New England Home Mortgage

What is an FHA Loan?

An FHA is a mortgage loan made by FHA-approved lenders and insured by the Federal Housing Administration (FHA). FHA loans are available for buying single and multi-family homes as well as refinancing a mortgage. An FHA is typically fixed in its rate and terms run from 10-30 years.

What are the requirements for an FHA loan?

According to FHA.com, requirements for a loan are as follows:

  • FICO® score at least 580 = 3.5% down payment.
  • FICO® score between 500 and 579 = 10% down payment.
  • MIP (Mortgage Insurance Premium ) is required.
  • Debt-to-Income Ratio < 43%.
  • The home must be the borrower's primary residence.

Pros of an FHA Loan

If you are a first time homebuyer and do not have a large down payment, an FHA loan is a good option. Only 3.5% is required for a down payment with a credit score of 580 or higher, and interest rates are less impacted by credit score. In addition, the debt-to-income requirements are less stringent than conventional loans, which often means more purchasing power. Another pro is the entirety of your down payment can come from gift funds or grants.

Cons of an FHA Loan

While you do not need a large down payment for an FHA loan, you do need mortgage insurance that lasts for the life of the loan. FHA loans require the borrower pay two insurance premiums. One is an upfront premium and is 1.75% of the loan amount. The second is an annual premium, ranging from 0.45 percent to 1.05 percent, depending on the term of the loan. There are also loan limits, which is a maximum loan amount the FHA will insure. These change annually by state.

Finding the best loan for your personal needs can be overwhelming. New England Home Mortgage strives to help you understand all your options and find the best fit for your financial situation. Read an overview of mortgage options here, or contact us today for an in-person appointment.

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