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- To qualify for an FHA loan, you need a 3.5% down payment, 580 credit score, and 43% DTI ratio.
- An FHA loan is easier to get than a conventional mortgage.
- The FHA offers several types of home loans, including loans for home improvements.
- Policygenius can help you compare homeowner’s insurance policies to find the right coverage for you, at the right price »
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What is an FHA loan?
An FHA loan is designed to help people in less-than-perfect financial situations buy homes. This type of mortgage is especially useful for first-time homebuyers who may not have had time to save a ton for a down payment or pay down all their debts yet.
When you buy a home, you choose between two basic types of mortgages: conventional government-backed.
A conventional mortgage is not backed by a government agency, and it’s a little harder to get than a government-backed loan. A conventional mortgage usually requires a 10% down payment, 620 credit score, and 36% debt-to-income ratio.
A government-backed mortgage is guaranteed by a federal agency; an FHA loan is guaranteed by the Federal Housing Administration. If you default on your mortgage payments, then the FHA offers your lender compensation.
Your loan will be backed by the FHA, but you don’t apply through the FHA. You’ll visit a regular mortgage lender that approves FHA loans. A lender’s website should specify whether it issues FHA loans.
An FHA loan only requires a 3.5% down payment, 43% debt-to-income ratio, and 580 credit score. Actually, you can apply for an FHA loan with a credit score as low as 500. But if your credit score is between 500 and 579, then you’ll need at least 10% for a down payment.
Who qualifies for an FHA loan
To receive an FHA loan, you must meet all of the following criteria:
- Credit score and down payment. If your credit score is at least 580, then you’ll need 3.5% for a down payment. You’ll need 10% if your score is between 500 and 579.
- Debt-to-income ratio. Your DTI ratio is the monthly amount you pay toward debts divided by your gross monthly income. For an FHA loan, your DTI ratio should be 43% or lower.
- Property type. You can use an FHA loan to buy a single-family home, or a multi-family home for up to four families. You can also buy a condo or manufactured home.
- Borrowing limit. The FHA restricts how much you can borrow. The limit depends on where you live and what type of property you buy. For example, the limit for a two-family home in Los Angeles will be different than for a four-family home in Orlando. Enter your state and county information to see your borrowing limits on the US Department of Housing and Urban Development website.
- Property standards. You can use an FHA loan to buy a home with normal wear and tear, but not one with major structural or safety issues. For example, your roof must be in good condition, and the home can’t be near a hazardous waste location. The property also can’t be in an area subject to a lot of noise, like a high-traffic road.
7 types of FHA loans
The FHA administers several types of home loans. See which one fits your homebuying situation:
- Traditional mortgage. This is probably what you think of when you hear the words “FHA loan.” It’s a mortgage for your primary residence, whether it’s a single- or multi-family home, and you’ll choose between a fixed or adjustable interest rate.
- Home Equity Conversion Mortgage. This FHA-backed loan is for older homeowners who want to tap into their home equity to receive cash.
- Construction to Permanent Loan. This loan is for people building a home.
- 203(k) Rehab Mortgage. Get approved for a mortgage and funds to make home improvements, all in one loan.
- Energy Efficient Mortgage. An EEM lets you roll the costs of energy-efficient repairs into your mortgage without making a bigger down payment. You can improve things like your furnace, insulation, or thermostat system.
- Title I Property Improvement Loan. This home improvement loan helps you make essential upgrades to your home.
- Section 245(a) Mortgage, or the Graduated Mortgage Payment Program. This FHA loan is for people at a low-to-moderate income level. You start with low monthly payments, and your payments increase as your income increases.
The pros and cons of FHA loans
FHA loans are great options for many Americans, but they aren’t for everyone. Here are some things to consider before you apply:
You may think you don’t qualify to buy a home, but an FHA mortgage makes it possible even if your finances aren’t as strong as you’d like.
Laura Grace Tarpley is the associate editor of banking and mortgages at Personal Finance Insider, covering mortgages, refinancing, bank accounts, and bank reviews. She is also a Certified Educator in Personal Finance (CEPF). Over her four years of covering personal finance, she has written extensively about ways to save, invest, and navigate loans.
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Originally published at https://www.businessinsider.com/personal-finance/fha-loan on .