FHA Loans Explained: What Homebuyers Should Know Before Applying

Buying a home does not always require a large down payment or a perfect credit history. For some buyers, an FHA loan can provide a more accessible path to homeownership while still offering the stability of a traditional mortgage.

FHA loans are insured by the Federal Housing Administration and issued through approved mortgage lenders. Because the federal government insures these loans against certain losses, lenders may be able to offer qualification requirements that differ from those of many conventional mortgage programs.

Here are a few things prospective homebuyers should understand before deciding whether an FHA loan may fit their plans.

FHA Loans Are Not Just for First-Time Buyers

FHA loans are often associated with first-time homebuyers, but you do not have to be purchasing your first home to qualify.

Eligible borrowers generally must intend to use the property as their primary residence. FHA financing may also be available for several types of properties, including qualifying single-family homes, condominiums, townhomes and certain two- to four-unit properties.

That flexibility can make FHA financing worth exploring for buyers at many different stages of homeownership.

The Down Payment Can Be Lower Than Many Buyers Expect

One of the best-known features of FHA financing is its minimum down payment requirement.

For qualifying borrowers, an FHA loan may allow a down payment as low as 3.5% of the purchase price. FHA guidelines also allow the required investment to come from certain acceptable sources, which may include personal funds, eligible gifts, grants and some forms of down payment assistance.

The amount you will personally need at closing depends on your individual loan, property and financial situation. Your loan professional can help you estimate the down payment, closing costs and other funds you may need.

Credit Is Only One Part of the Picture

You do not necessarily need perfect credit to explore an FHA loan.

FHA guidelines may accommodate borrowers with a broader range of FICO® scores than some other mortgage options. Your actual eligibility, down payment requirement and available terms will depend on your complete financial profile and the lender’s underwriting requirements.

Income, employment history, debts, available funds and other financial information may also be reviewed when determining whether you qualify.

*FICO® is a registered mark of Fair Isaac Corporation.

FHA Loans Include Mortgage Insurance

Another important consideration is mortgage insurance.

FHA-insured mortgages generally include an upfront mortgage insurance premium as well as an annual mortgage insurance premium that is typically collected as part of the monthly mortgage payment.

Mortgage insurance is an important part of the FHA program because it helps protect the lender if a borrower defaults. When comparing mortgage options, consider the complete monthly payment and long-term cost rather than focusing only on the down payment.

The Home Must Meet FHA Requirements

FHA financing is not based solely on the borrower. The property must also meet applicable FHA requirements.

An appraisal is used to help establish the property’s value and evaluate whether it meets applicable FHA property standards. Depending on the property, certain issues may need to be addressed before the loan can move forward.

This is one reason it can be helpful to tell your real estate agent early if you are considering FHA financing.

FHA Loan Limits Vary by Location

FHA establishes maximum loan amounts each year, and those limits vary based on the property’s location and number of units. Buyers in higher-cost housing markets may have different limits than buyers in other parts of the country.

A local loan professional can help you determine the FHA loan limit that applies to the property you are considering.

Is an FHA Loan Right for You?

An FHA loan can be a useful option, but no mortgage program is right for everyone.

Your down payment, credit profile, monthly budget, future plans and the type of property you want to purchase can all influence which mortgage makes the most sense for your situation.

A local PRMI loan professional can walk you through FHA financing, answer your questions and compare available mortgage options with you. Getting pre-qualified can also help you better understand your purchasing range before you begin seriously shopping for a home.

Contact your local Primary Residential Mortgage, Inc. branch to start the conversation and learn whether an FHA loan may fit your homeownership goals.