What is an FHA Loan? Can You Use One as a Mortgage?

Achieving homeownership is a significant milestone that often requires considerable effort and time. Fortunately, there are numerous avenues available to turn this aspiration into reality, particularly in today’s real estate landscape. One such avenue is purchasing a house using an FHA loan—a financing option you may have heard of before, but did you know it can serve as your mortgage?

That’s correct. FHA loans extend the opportunity of homeownership to many individuals who may not meet conventional lending criteria. Whether you have a less-than-ideal credit score, limited credit history, or are constrained by a modest down payment, an FHA loan could pave the way for you to step over the threshold of your new home with a smile.

In this article, we’ll acquaint you with FHA loans, outline the eligibility requirements, and even provide guidance on initiating the loan application process—all within minutes of finishing this read. Your dream home—and mortgage—awaits. Let’s dive in!

An FHA loan, as described by NerdWallet, is a mortgage “insured by the Federal Housing Administration.” The Federal Housing Administration (FHA) is just one among various entities offering programs aimed at assisting individuals in affording a home when traditional mortgage avenues may not be feasible. Apart from FHA loans, there exist several other opportunities with similar objectives, such as VA loans, USDA loans, the Freddie Mac Home Possible loan, and the Fannie Mae HomeReady loan.

In this discussion, we’ll solely focus on FHA loans and delve into the eligibility requirements shortly.

Initially, it’s important to note that FHA loans are serviced through FHA-approved lenders, meaning you won’t directly receive the loan from the FHA itself. Consequently, it’s advisable to contact multiple lenders to explore their respective offerings. As TheLendersNetwork underscores, “Not all FHA-approved lenders offer the same interest rate and costs—even on the same FHA loan. Costs, services, and underwriting standards will vary among lenders or mortgage brokers, so borrowers need to shop around.” Thus, it’s prudent not to settle for the first offer you receive.

Furthermore, it’s essential to recognize that FHA loans encompass a broader scope beyond the conventional single-family home. According to NerdWallet, 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.” Therefore, conducting research on the various types of FHA loans can assist in determining the most suitable option based on your circumstances.

So, what sets apart the FHA loan from a typical mortgage?

A primary distinction lies in the insurance associated with the loan. Traditional mortgages often entail private mortgage insurance (PMI). According to Investopedia, PMI costs “typically run about 0.5 percent to 1 percent of the loan,” depending on factors like down payment size and loan amount. Though seemingly modest, even 1% of a $500,000 loan totals $5,000, a considerable sum solely for insurance premiums.

In contrast, FHA loans necessitate a mortgage insurance premium (MIP). Both PMIs and MIPs serve to safeguard the lender in case of default. However, under an FHA loan, you’ll encounter two MIPs. The first is paid upfront at the closing of your new home, with the second being paid annually for the duration of your loan repayment, in most instances. Hence, it’s crucial to factor in both these MIPs when calculating costs.

As per Bankrate.com, upfront MIP costs typically amount to “1.75 percent of the loan amount.” Additionally, annual mortgage insurance premiums range from “0.45 percent to 1.05 percent of the loan amount each year” throughout your loan term. Apart from these insurance premiums, there are various avenues through which you can qualify for an FHA loan. Let’s delve into those next.

As mentioned earlier, FHA loans offer a pathway to homeownership for those who may not qualify for conventional mortgages. The minimum credit score required to qualify is 500. The higher your credit score, the lower your down payment requirement. In certain circumstances, it’s possible to make a down payment as low as 3.5%. However, individuals with a modest amount of cash and a good credit score are likely to qualify.

Additionally, properties being purchased with an FHA loan must meet FHA minimum property requirements. Since FHA loan applicants are considered riskier compared to those eligible for conventional mortgages, lenders want to ensure that their investments are secured by reputable assets, should the loan default.

It’s worth noting that FHA loans can also be used for rental properties that you also occupy:

“You have to choose a multi-unit property—a duplex, triplex, or fourplex—and live in one of the units. The rent from the other units can partially or even fully offset your mortgage payment,” advises TheMortgageReports.com.

Even if your primary income covers the mortgage payment, renting out the additional units could potentially generate profit, all within the framework of an FHA loan.

Many individuals turn to FHA loans primarily because they lack the funds for a down payment. Conventional mortgages often require a hefty 20% down payment, making homeownership unattainable for many middle-class citizens, particularly in cities with soaring real estate prices. FHA loans offer a solution by typically demanding a much lower down payment.

However, it’s essential to weigh the associated costs. Opting for a conventional mortgage with a 20% down payment exempts you from paying PMI premiums. Over the mortgage’s lifespan, avoiding these extra insurance expenses can amount to significant savings, potentially totaling thousands of dollars. In some cases, the savings might even compensate for the larger down payment required. When deciding between an FHA loan and a conventional mortgage, consider this aspect carefully. While an FHA loan may expedite your path to homeownership, it may come at a greater overall cost compared to spending additional time building up your down payment fund.

Prepare for more good news if you’re considering an FHA loan—the application process is straightforward, akin to filling out a credit application.

Your financial situation, including your debt-to-income ratio, savings, investments, and other financial indicators, will be evaluated. Even if you have limited credit history, you can demonstrate your financial responsibility through alternative means. Lenders may request recent bills, pay stubs, or other documents to showcase your money management skills.

To qualify for different types of FHA loans, research what additional requirements may apply. Ensure you shop around for the best rates and inform lenders that you’re comparing offers. Additionally, carefully review the terms and conditions. When comparing loan options, factors such as interest rates, mortgage insurance premiums, closing costs, and more should be considered. Refrain from making a decision until you have all offers in writing.

We trust this brief overview of FHA loans has ignited your enthusiasm for homeownership. It’s a reachable goal, and you have the power to achieve it! As with any endeavor, knowledge is key, and leveraging that knowledge is crucial. Don’t let the absence of a 20% down payment deter you from pursuing your dream of homeownership—alternative paths are available!

Now that you’ve gained insight into FHA loans, delve deeper into the subject. Consider if this opportunity aligns with your goals. Connect with an FHA lender to explore your options further. Your days of renting or living with relatives may soon be behind you, making that “Welcome Home” mat all the more meaningful.