July 01, 2020 at 12:00pm | Josh Turner
FHA Loan: What You Need to Know

An FHA loan is a mortgage insured by the Federal Housing Administration. Allowing down payments as low as 3.5% with a 580 FICO, FHA loans are helpful for buyers with limited savings or lower credit scores.

What is an FHA loan?

An FHA loan is a mortgage insured by the Federal Housing Administration. With a minimum 3.5% down payment for borrowers with a credit score of 580 or higher, FHA loans are popular among first-time homebuyers who have little savings or credit challenges. The FHA insures mortgages issued by lenders, like banks, credit unions, and nonbanks. That insurance protects lenders in case of default, which is why FHA lenders are willing to offer favorable terms to borrowers who might not otherwise qualify for a home loan.

“Only an FHA-approved lender can issue an FHA-insured loan.”

An FHA home loan can be used to buy or refinance single-family houses, two- to four-unit multifamily homes, condominiums, and certain manufactured and mobile homes. Specific types of FHA loans can also be used for new construction or for renovating an existing home.

 Calculate your FHA loan payment

What is the FHA?

The Federal Housing Administration — better known as the FHA — has been part of the U.S. Department of Housing and Urban Development since 1965. But the FHA actually began more than 30 years before that, as a component of the New Deal. In addition to a stock market crash and the Dust Bowl drought, the Great Depression saw a housing market bubble burst. By early 1933, roughly half of American homeowners had defaulted on their mortgages.
The FHA was created as part of the National Housing Act of 1934 to stem the tide of foreclosures and help make homeownership more affordable. It established the 20% down payment as a new norm by insuring mortgages for up to 80% of a home's value — previously, homeowners had been limited to borrowing 50%-60%.
Today, the FHA insures loans for about 8 million single-family homes.

What's the difference between an FHA and conventional loan?

It's easier to qualify for an FHA loan than for a conventional loan, which is a mortgage that isn't insured or guaranteed by the federal government. FHA loans allow for lower credit scores than conventional loans and, in some cases, lower monthly mortgage insurance payments. FHA rules are more liberal regarding gifts of down payment money from family, employers, or charitable organizations. FHA loans may involve closing costs that aren't required by conventional loans.


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