What is an FHA Loan?
An FHA loan is a mortgage insured by the Federal Housing Administration, a government agency within the U.S. Department of Housing and Urban Development (HUD). These loans are designed to make homeownership more accessible, particularly for first-time buyers who may not have a large down payment saved or perfect credit.
Unlike conventional loans, FHA loans are backed by the government, which reduces the risk for lenders. This allows lenders to offer more favorable terms, including lower down payments and more flexible credit requirements.
Key Takeaway
FHA loans require as little as 3.5% down and accept credit scores as low as 580, making them one of the most accessible paths to homeownership for first-time buyers.
Main Benefits of FHA Loans
Low Down Payment
Put down as little as 3.5% with a credit score of 580 or higher. On a $300,000 home, that's only $10,500.
Flexible Credit Requirements
Qualify with a credit score as low as 580, or even 500 with 10% down.
Seller Concessions
Sellers can contribute up to 6% of the purchase price toward your closing costs.
Gift Funds Allowed
Use gift money from family members for your entire down payment and closing costs.
Lower Interest Rates
Competitive rates that are often lower than conventional loans for borrowers with similar credit profiles.
Assumable Loans
Future buyers can assume your FHA loan, potentially making your home more attractive when you sell.
FHA Loan Requirements
Credit Score
While FHA loans are known for their flexibility, you'll still need to meet minimum credit requirements:
- 580 or higher: Qualify for 3.5% down payment
- 500-579: May qualify with 10% down payment
- Below 500: Generally not eligible for FHA financing
Debt-to-Income Ratio
FHA loans typically allow debt-to-income (DTI) ratios up to 43%, though some lenders may approve higher ratios with compensating factors like a larger down payment or significant cash reserves.
Employment History
You'll need to demonstrate steady employment for at least two years. Self-employed borrowers can qualify but will need to provide additional documentation.
Property Requirements
The home must be your primary residence and meet FHA property standards. An FHA-approved appraiser will inspect the property to ensure it meets minimum safety and livability standards.
Understanding FHA Mortgage Insurance
FHA loans require two types of mortgage insurance premiums (MIP) that protect the lender in case of default:
Upfront Mortgage Insurance Premium (UFMIP)
You'll pay 1.75% of the loan amount upfront, which can be rolled into your loan amount. On a $300,000 loan, that's $5,250. Most borrowers choose to finance this cost rather than pay it at closing.
Annual Mortgage Insurance Premium
Annual MIP ranges from 0.45% to 1.05% of the loan amount, divided into monthly payments. The exact rate depends on your loan amount, loan-to-value ratio, and loan term.
Important note: With recent changes to FHA guidelines, mortgage insurance can be removed after 11 years if you put down at least 10%. However, for loans with less than 10% down, MIP remains for the life of the loan unless you refinance to a conventional loan.
FHA Loan Limits
FHA loan limits vary by county and are based on the median home prices in each area. For 2024:
- Low-cost areas: $498,257 (minimum floor)
- High-cost areas: Up to $1,149,825 (maximum ceiling)
Your Loan Officer can help you determine the exact FHA loan limit for your area and find the best financing option for your situation.
Who Should Consider an FHA Loan?
FHA loans are ideal for:
- First-time homebuyers who haven't built up substantial savings for a down payment
- Buyers with lower credit scores who might not qualify for conventional financing
- Buyers with past financial challenges who have since recovered (bankruptcies, foreclosures)
- Anyone who prefers to keep more cash available for home improvements or emergency savings
The FHA Loan Process
Getting an FHA loan through Bedrock Mortgage is straightforward:
- Step 1: Apply online — Complete our 10-minute application and receive preliminary approval
- Step 2: Get pre-approved — Work with your dedicated Loan Officer to gather documentation and secure your pre-approval letter
- Step 3: Shop for homes — Start house hunting with confidence knowing your budget
- Step 4: Home inspection & appraisal — FHA requires a home inspection to ensure the property meets safety standards
- Step 5: Close on your home — Review and sign final documents, then get your keys!
Frequently Asked Questions
Can I use an FHA loan to buy a condo?
Yes, but the condo complex must be FHA-approved. Many condos are approved, and your Loan Officer can help verify the status of any property you're considering.
Can I have an FHA loan and a conventional loan at the same time?
Generally, you can only have one FHA loan at a time for your primary residence. However, there are exceptions for relocation or upsizing to accommodate a growing family.
How long do I need to wait after bankruptcy or foreclosure?
FHA loans have more lenient waiting periods than conventional loans. After bankruptcy, you may qualify in as little as 1-2 years with documented credit rebuilding. After foreclosure, the typical waiting period is 3 years.
Is mortgage insurance tax deductible?
FHA mortgage insurance premiums may be tax deductible depending on your income and tax situation. Consult with a tax professional for guidance specific to your circumstances.