The Federal Housing Administration (FHA) offers mortgage insurance on loans only made by approved lenders. The FHA provides insurance on these loans for singly family and multi-family homes. Since it is the biggest insurer for residential mortgages in the world, it has insured millions of properties since its establishment in 1934. Understanding the requirements for FHA loans can help you protect yourself against losses that come from defaulting on your home mortgage.
Necessary Credit Requirements
The minimum credit score to qualify for FHA loans depends on the loan that the borrower needs. The FHA has stated that scores of 580 or better are required. However, if you have a lower credit score, you can borrow 90% of the loan-to-value ratio.
If you have a lower credit score than 500, you are not eligible for an FHA loan. In some cases, the FHA does make allowances for applicants who have nontraditional credit history or insufficient credit, but you have to meet certain requirements for income. If you feel this might be your case, you should talk to your FHA loan specialist directly.
Minimum Down Payment
A down payment of 3.5% of the purchase price of the home is required for FHA loans. In some cases, it could be over 5% but depends on the area in which you are purchasing a home. Borrowers must use their own savings to make the payment and show proof that it is their own money and not borrowed, such as taking money from a credit card account and depositing it into their savings account before the down payment is made. However, down payments can come from gifts from a family member or grants from a state or local government down payment assistance program.
Lenders, builders, and home sellers are allowed to pay some of the borrower's closing costs with FHA, such as for the title expenses, credit report, and appraisal. Builders might pay for closing as a way to encourage the borrower to buy a new home in their community.
However, lenders are apt to charge a higher interest rate on a loan if they are paying for closing costs. Borrowers can also use what's called a good faith estimate of closing to compare closing costs on different loans to find the best interest rates.
FHA Requirements for Lenders
Potential borrowers can't pick any lender to work with the FHA. You may only use FHA-approved lenders. Since the FHA is not a lender but an insurance funding source, borrowers have to obtain their loans from insurers who are approved with the FHA. Borrowers should compare all lenders and costs with the same FHA loan to find the best lender. Costs, underwriting standards, and services vary greatly between lenders with any FHA loan.
FHA Requirements for Mortgage Insurance
Two mortgage insurance premiums are necessary under FHA programs. The first, the upfront premium, costs 1.75% of the total loan amount. Borrowers must pay this premium when the loan is approved, but the house can be financed as part of the loan.
The second is an annual premium that differs based on the length of loan, initial loan-to-value ratio and amount borrowed.