An FHA loan provides a government-insured loan with flexible loan options. Even experienced homeowners may need to plan for a long time for a new home purchase. Fortunately, FHA loans may help some buyers get into the home of their dreams with a lower down payment.

What is an FHA loan?

FHA loans are mortgages backed by the U.S. Federal Housing Administration. Lenders, such as banks and credit unions, that provide FHA loans provide funding for home purchases while requiring a lower down payment. Buyers may get into a new home with as little as 3.5% down.

Using conventional loans, a lower down payment requires the borrower to get private mortgage insurance. This special type of insurance protects the lender just in case the borrower is not able to pay. The cost of PMI is added to the monthly payment until the amount of the loan reaches 20%. FHA loans also require what is called MIP or monthly insurance premium. This is very similar to PMI, however, it may not be removed at the same rate as conventional, and in many cases when the minimum down payment option is used, it cannot be removed at all once 20% equity is achieved.

What is required for an FHA loan?

Many of the same documents are required for an FHA loan that any potential lender will want to see: employment history, appraisal, debt-to-income ration. A few additional stipulations are also attached to the FHA loan process. Buyers may have to bring 3.5% of the purchase price as a down payment, more if they have a credit score below 580. FHA loans are only available for the borrower’s primary residence.

Credit requirements may also be lower for FHA loans as well as the ability to go quite a bit higher on debt to income ratio. Each lender looks at individual applications and may ask for additional documentation or explanations. They are often able to work with buyers with a lower credit score or shorter credit history than in other situations. FHA loans also have shorter waiting requirements after a bankruptcy or foreclosure.

The appraisal requirements for FHA are more strict than conventional. Appraisers are looking for things that may not meet certain health and safety requirements. Examples of this may be chipped or peeling paint, no GFCI outlet where required, missing railings on stairs of 3 or more, and broken windows. We can do FHA 203k renovation financing to bring a property up to minimum standards and/or do remodeling and additions.

How FHA Loans Work

• Purchase your home with as little as 3.5% down payment (compared to 20% required on most loans).
• Purchase a single family, townhome, condominium or 2-4 unit property.
• You must intend to occupy the home as your primary residence.
• 30-, 25-, 20- and 15-year terms are all available with fixed rates.
• Adjustable rate mortgage sometimes available.
• 203k renovation loan is available to do repairs, remodeling or additions.
• Pay your mortgage off at any time without pre-payment penalties.

Have questions?  Give us a call!  One of our mortgage specialists would be happy to answer all of your questions.

**The Spahr Team is not affiliated with or acting on behalf of or at the direction of FHA, VA, USDA or the Federal Government.