The Federal Housing Administration (FHA) is a government entity that makes it easy for first-time home buyers to purchase a home with low down payment requirements and other perks. However, the downsides of FHA loans include paying monthly mortgage insurance and only being able to finance your primary residence with occupancy restrictions.
Are you thinking about applying for an FHA loan? This article discusses everything you need to know about FHA loans and why this loan program may be a great option for you.
What is an FHA loan?
The FHA is a government agency that operates under authority of the Department of Housing and Urban Development (HUD), which oversees housing laws in urban centers around the United States. Even if you aren’t in an urban area, you can still qualify for an FHA loan.
FHA loans are meant for first-time home buyers and borrowers with less than stellar credit to be able to afford a home and live the American Dream. FHA loans are often the next best option for borrowers who can’t qualify for a conventional mortgage.
FHA loans have low down payment requirements, so average home buyers can participate in the housing market and buy their first property with minimal costs. Down payment requirements for FHA loans go as low as 3.5%, although it’s not always advised to use the minimum down payment for your FHA loan.
How do you qualify for an FHA loan?
Qualifying for an FHA loan is easier than qualifying for a conventional mortgage. FHA borrowers must have a credit score of 580 or higher, with the best interest rates reserved for borrowers with credit scores of 750 and above.
It’s important to understand that FHA loans are only for your primary residence, meaning you cannot finance an investment property with an FHA loan. Borrowers looking to finance an investment property will need to pursue a conventional mortgage or other alternative financing methods.
Other requirements for FHA loans include occupying the property within 60 days after closing and continuing to use the property as your primary residence. Failure to occupy the home as your primary residence may be a form of mortgage fraud, so be sure to do additional research about the laws in your state regarding occupancy requirements.
FHA mortgage insurance
Since the FHA offers loans with low down payment requirements for borrowers with low credit scores, they need to insure their loans with mortgage insurance.
One way to think of FHA mortgage insurance is that you pay an insurance premium each month for your mortgage bill. In exchange for a mortgage with low down payment requirements and other perks for first-time home buyers, the FHA charges a monthly insurance premium on each home loan they issue.
In addition to monthly mortgage insurance, FHA borrowers also pay an upfront mortgage insurance premium (UFMIP), which is a one time fee paid at closing. As of 2023, the UFMIP is equal to 1.75% of the loan amount.
Do you want to get the home buying process started this year? Contact Pastore Properties of Richmond for a local agent who can recommend lenders to help you qualify for an FHA or conventional mortgage in the Richmond area. Give us a call at (804) 234-4480 or visit our blog for more helpful information.