What Is An FHA Loan?

An FHA loan is a mortgage that is insured by the Federal Housing Administration (FHA) and designed to reduce the risk of loss to the lender while also providing home ownership opportunities for everyone. In summary, the federal government insures loans for FHA approved lenders who fund FHA loans. This reduces the overall risk of loss if a borrower defaults on their FHA mortgage payments. In short, the lender knows that the government will provide a certain allocation of payment for the mortgage balance should a default occur.

The FHA mortgage program was created in response to snowball of defaults and subsequent foreclosures that occurred in the 1930s during the time of the Great Depression. And FHA loans are generally available to homeowners with credit scores of 580 or higher, and with down payments as low as 3.5% which makes these loans accessible to almost all borrowers across the spectrum of credit and equity.

The FHA program provides mortgage lenders with adequate insurance and certainty to make the loans to borrowers, which ultimately helps stimulate the housing market by making loans accessible and affordable for everyone across the spectrum of eligibility.

Who Are FHA Loans Best For?

The FHA mortgage loan is a nearly perfect option for borrowers with less-than-perfect credit with a minimum 580 FICO or higher, and/or with limited down payment for their home. In most cases, 3.5% down payment is all that’s required by the FHA to finance a loan.

How Does An FHA Loan Work?

FHA mortgage loans provided insured by the Federal Housing Administration (FHA) may make it easier for you to buy a home. For an FHA loan, a minimum down payment of 3.5% is required. Borrowers who cannot afford a traditional down payment of 20% or are unable to receive approval for private mortgage insurance may consider an FHA loan. Borrowers with less-than-perfect FICO scores may also benefit from an FHA loan, which allows home ownership and credit improvement through payment of mortgage payments.

FHA Loan Benefits

  • Credit score requirements are generally much lower than alternative mortgage products.
  • Down payment requirements are also generally much lower than alternative mortgage products.
  • You may be able to qualify for an FHA mortgage even with a bankruptcy or other financial problems in the past that affect credit history and/or FICO scores.
  • FHA mortgage products are available in 30 year terms, 15 years, fixed rates and adjustable rate products.
  • The minimum down payment is only 3.5% which allows affordability and homeownership for everyone across the spectrum.
  • Closing costs can be rolled into the mortgage loan to save out-of-pocket expenses.
  • If you are already in an FHA loan, you can refinance with an FHA streamline with less requirements in terms of documentation as well as potentially reduced requirements for an appraisal.

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