A Federal Housing Administration (FHA) loan is a home mortgage that is insured by the government and issued by a bank or other lender that is approved by the agency. FHA loans require a lower minimum down payment than many conventional loans, and applicants may have lower credit scores than is usually required. FHA loans are designed to help low- to moderate-income families attain homeownership. They are particularly popular with first-time homebuyers. FIND OUT IF YOU QUALIFY FOR AN FHA LOAN

FHA loans come in 15-year and 30-year terms with fixed interest rates. The agency’s flexible underwriting standards are designed to help give borrowers who might not qualify for private mortgages a chance to become homeowners.

But there’s a catch: Borrowers must pay FHA mortgage insurance, which is designed to protect the lender from a loss if the borrower defaults. Mortgage insurance is required on most loans when borrowers put down less than 20 percent. All FHA loans require the borrower to pay two mortgage insurance premiums

FHA Loan Requirements

• Have a credit score of 500 to 579 with 10% down payment, or a credit score of 580 or higher with 3.5% down payment;

• Have verifiable employment history for the last two years, and verifiable income through pay stubs, federal tax returns and bank statements;

• The property has to be the borrower’s primary residence, and it has to be appraised by an FHA-approved appraiser and meets HUD guidelines;

• Front-end debt-to-income ratio (monthly mortgage payments) of no more than 31% of gross monthly income. Bank-end debt-to-income ratio (mortgage plus all monthly debt payments) of no more than 43% of gross monthly income.

Mortgage Insurance

Since your credit score is lower, you’re at a bigger risk of default. To protect the lender, you have to pay mortgage insurance. You can roll the upfront insurance premium into your closing costs, but your annual premiums will be divided into 12 installments and show up on every mortgage bill.

If you put down less than 10 percent, you have to pay those annual premiums for the entire life of the loan. There’s no escaping them. That’s a big difference from conventional loans: Once you build up 20 percent equity, you no longer have to pay for private mortgage insurance.

Summary

An FHA loan might be the right choice for you if you have decent credit and don’t have a large down payment saved. The fact that you can get an FHA mortgage with just 3.5 percent down puts homeownership within grasp for many people, but that doesn’t mean FHA loans are the best option for everyone.

If you have strong credit, there’s a good chance you’ll be able to qualify for a conventional mortgage even if you can’t put 20 percent down. With a conventional loan, you’ll be able to get out of PMI once you’ve built sufficient equity.

FHA loans are a great option for borrowers who don’t have great credit or don’t have a lot of money to use for a down payment. However, keep in mind that the long-term costs of an FHA mortgage will be higher due to the unavoidable mortgage insurance payments involved. We can help you decide if this is the best fit for your situation, give me a call or text at 425-224-5794 if you have any questions.