FHA Loan: What is it and What are the Benefits of Getting One?

Those looking to purchase a new home are tasked with choosing between a number of different financing options. One of the more popular loan varieties among first-time home buyers is what is known as an FHA loan. These loans are insured by the Federal Housing Administration and are issued by FHA-approved banks and lenders.

Over 84% of first-time home buyers had their mortgages insured by the FHA in the fiscal year 2021. These loans can be an excellent option for low to moderate-income families looking to finance their new home purchase. Let’s take a closer look at FHA loans and discuss some of the ways borrowers stand to benefit from this form of financing.

What is an FHA Loan?

An FHA loan is a type of mortgage loan that is backed by the U.S. government. Specifically, FHA loans are insured by the Federal Housing Authority, which is part of the U.S. Department of Housing and Development.

The FHA provides mortgage insurance on loans provided by certain agency-approved lenders. This insurance essentially protects lenders against losses. In the event that a homeowner defaults on their loan, the FHA will compensate the lender for the unpaid principal. This loss protection encourages lenders to offer more mortgages and provides a path to homeownership for borrowers who may not qualify for other loans.

Who Qualifies for an FHA Loan?

To qualify for an FHA loan, a borrower must: 

  • Have a FICO credit score of at least 500
  • Have at least two years of consecutive employment history
  • Have verifiable income 
  • Be financing a primary residence 
  • Have the property appraised by an FHA-approved appraiser
  • Have a monthly mortgage payment that does not exceed 31% of their gross monthly income
  • Have a combined monthly debt total (including mortgage payments) that does not exceed 43% of their gross monthly income. 
  • Have been out of bankruptcy for at least 2 years
  • Have waited at least 3 years since a previous foreclosure before applying

Are There Different Kinds of FHA Loans?

There are 5 varieties of FHA loans available to borrowers depending on their specific needs and qualifications. Here are the 5 kinds of FHA loans: 

  1. Traditional Mortgage: Used to finance a primary residence. 
  2. Home Equity Conversion Mortgage: A type of reverse mortgage for borrowers ages 62+ that allows borrowers to withdraw some of their home equity as cash. 
  3. FHA 203(k) Improvement Loan: A mortgage that includes some of the expected costs of home improvements and renovations in the total lending amount. 
  4. FHA Energy Efficient Mortgage: A mortgage that includes additional funds to cover the cost of home upgrades that can reduce utility bills and energy usage. 
  5. Section 245(a) Loan: A type of graduated payment mortgage that gradually increases the cost of monthly payments over time. 

Borrowers considering using an FHA loan to finance their home purchase will want to account for both their immediate financial situation and long-term financial plans when deciding which FHA loan is right for them.

What are the Benefits of an FHA Loan?

There are many reasons why a borrower may choose to take out an FHA loan rather than another variety of mortgage loans. For example, borrowers with credit scores as low as 500 may still qualify for an FHA loan. Given that most traditional mortgage lenders look for a credit score of at least 620, borrowers with poor credit may stand a better chance of approval if they pursue an FHA mortgage.

FHA loans also offer borrowers lower down payment options. Buyers with credit scores of at least 580 can buy a home with a down payment as low as 3.5%. Buyers with credit scores between 500 and 579 can purchase a home with just a 10% down payment.

These more flexible qualifications may enable prospective buyers to purchase homes despite falling short of more traditional mortgage requirements. This may directly benefit first-time home buyers whose credit or other financial histories would otherwise have delayed their home ownership aspirations.

It’s important to keep in mind that the long-term cost of an FHA loan may prove to be higher than some other mortgage loan varieties. This is due to the fact that the borrower must also pay for mortgage insurance and factor this expense into the overall cost. While the interest rates on FHA loans may sometimes prove lower than those of conventional mortgages, the APR on an FHA loan may actually exceed that of other mortgages.

FHA Loans from Loan X Mortgage

If you’re looking to purchase a new home and think an FHA loan may be right for you, the team at Loan X Mortgage is here to help you take the next step in your lending journey. As one of Michigan’s top mortgage brokerages, Loan X has experience working with clients from all walks of life. 

From FHA loans to home equity loans to everything in between, Loan X has the industry know-how necessary to help buyers secure the best possible deal for their unique financial situation. Reach out to speak with one of our lending specialists and get started on your journey to homeownership today.