When it comes to buying a home, there are a variety of financing options available these days. FHA mortgages continue to be a traditional option that many homeowners trust. These government-backed loans offer a host of benefits, especially for buyers with lower credit scores or limited savings.
Curious to learn whether an FHA mortgage is right for you? We’re sharing everything you need to know below:
FHA mortgages explained
An FHA mortgage is a home loan that is insured by the Federal Housing Administration. Here’s how it typically works: different lenders - such as credit unions and banks - issue the loan, and then the FHA insures the loan in the event the borrower defaults. As a result, FHA lenders offer favorable terms to homebuyers who might not qualify through other avenues.
The Federal Housing Administration was initially created in the 1930s as part of the National Housing Act. Due to the Great Depression and other economic events, nearly 50% of homeowners had defaulted on their home loans by the early 1930s.
In order to reduce the wave of foreclosures and make homeownership more accessible to people, the FHA was created. Previously, homebuyers were also expected to put down about 50% up front. The creation of the FHA made it possible for 20% down to become the new standard, and homebuyers were allowed to borrow much more. Today, the FHA mortgage is still a commonly used financing option, especially for first-time borrowers.
Different types of FHA home loans
In addition to standard purchase loans, the FHA offers many different types of home loans. These are some of the most common:
203(b) loan: this is a basic home mortgage with fixed or adjustable rates.
203(k) loan: this is a rehab mortgage that allows borrowers to finance and renovate a home using one loan.
Construction to permanent loan: the CP loan allows borrowers to finance the purchase of land and the construction of a new home.
Title I property improvement loan: this loan can be used to renovate a home, including manufactured homes.
Energy efficient mortgage: the EEM loan is used to finance energy-efficient upgrades.
What are the requirements for an FHA mortgage?
Every FHA loan has different requirements, and there are limits on the amount you can borrow for every type of loan. The limits vary by location, but they range from $356,362 to $822,375 (as of 2021).
The baseline requirements for an FHA mortgage mostly come down to your FICO score. Those with a FICO score of at least 580 qualify for a 3.5% down payment. Borrowers with a FICO score of 500 - 579 qualify for a 10% down payment.
The debt-to-income ratio must be less than 43%, and borrowers must have steady, reliable income with proof of employment. Depending on your financial situation, you may qualify for even better terms.
These lenient requirements make FHA mortgages a very attractive option for first-time buyers, those with little savings, or borrowers who are working on rebuilding their credit. They are also great options for current homeowners who want to renovate their home, but can’t qualify for a home-improvement loan through other avenues.
See if you qualify for an FHA mortgage today
Atlas Crown Mortgage helps those in Phoenix and Scottsdale find the perfect home loan to purchase or renovate a house. We work with a variety of lenders that offer flexible terms, even for borrowers with past credit challenges. Contact us today to see whether you qualify for an FHA mortgage.