What is an FHA loan?

What the FHA does is insure loans so that lenders can offer mortgage assistance to individuals who have:

  • fair or poor credit

  • a low down payment (of at least 3.5 percent)

  • undergone bankruptcy

  • been foreclosed on

Basically, the government insures loans for FHA-approved lenders thereby reducing the risk of loss for lenders if they lend to borrowers who default on their mortgage payments. The FHA program was established in the 1930s to help stimulate the housing market by making loans affordable and accessible to all

Traditionally, FHA loans have helped military families when their family members return from war as well as assist the handicapped, the elderly and low-income families in purchasing a home. It’s important to know, too, that FHA loans are not just for first-time home buyers; anybody can get one if they qualify

What are the advantages of FHA loans?

An FHA loan is the easiest type of mortgage loan to qualify for because they require a low down payment, and you don’t have to have the best credit. Furthermore, because FHA insures your mortgage, lenders are more apt to provide loans to potential home buyers. Also FHA loans are assumable, which means if you want to sell your home, the buyer can "assume" the loan you have. FHA loans can be used for a refinance or a home purchase

What do I need to qualify for an FHA loan?

  • Be able to show steady employment history or worked for the same employer for the last two years.

  • Must have lawful residency in the U.S., a valid social security number and be of legal age to sign a mortgage in your state.

  • Must be able to make a minimum down payment of 3.5 percent or be able to put 10 percent down if your credit score is between 500 and 579. The money can also be gifted by a family member (conventional financing does not allow gifting).

  • Must have a property appraisal from an appraiser that is FHA-approved.

  • Mortgage payment (including property insurance, interest, principal and property taxes) must be less than 31 percent of your gross monthly income.

  • Monthly debt (student loans, auto, credit cards, mortgage, etc…) cannot be higher than 43 percent of your monthly income.

  • Must have at least a minimum credit score of 500. A credit score of 580 and above requires a 3.5 percent down payment and a credit score of 500-579 requires a 10 percent down payment. FHA-qualified lenders use a case-by-case basis to determine if an applicant is credit-worthy or not.

  • Must be two years out of bankruptcy with good credit.

  • Must be three years out of foreclosure with good credit.