What Is an FHA Loan?

An FHA loan is a mortgage insured by the Federal Housing Administration (FHA), a U.S. government agency. Because they are government-backed, lenders can offer loans with more lenient qualifying requirements, such as lower down payments and credit scores, compared to conventional loans. This makes them a popular choice for first-time homebuyers.

FHA Loan Requirements & Features

• Minimum Down Payment: The primary appeal of an FHA loan is its low down payment requirement, which can be as low as 3.5% of the home's purchase price.
• Mortgage Insurance Premium (MIP): FHA loans require borrowers to pay a mortgage insurance premium (MIP) to protect the lender against default. This includes an upfront premium (UFMIP), usually financed into the loan, and an annual premium paid in monthly installments.
• Credit Score: While lenders have their own criteria, the FHA allows for lower credit scores than most conventional loan programs.
• Loan Limits: The FHA sets maximum loan amounts that vary by county. You cannot borrow more than the FHA limit in your area.

Frequently Asked Questions (FAQ)

What is FHA Mortgage Insurance (MIP)?

FHA MIP is a mandatory insurance policy for all FHA borrowers. It consists of two parts: an Upfront Mortgage Insurance Premium (UFMIP) of 1.75% of the base loan amount, and an Annual MIP (paid monthly) that typically ranges from 0.15% to 0.75% of the loan balance per year. Unlike conventional PMI, the annual MIP often lasts for the entire loan term if you make a down payment of less than 10%.

What is the minimum down payment for an FHA loan?

The minimum down payment for an FHA loan is 3.5% if your credit score is 580 or higher. If your credit score is between 500 and 579, a 10% down payment is required.

FHA vs. Conventional Loan: What's the difference?

FHA loans are government-insured, allowing for lower down payments and more flexible credit requirements. Conventional loans are not insured by the government and typically require higher credit scores and larger down payments (often 20% to avoid private mortgage insurance). While FHA loans are more accessible, their mandatory MIP can sometimes make them more expensive over the life of the loan compared to a conventional loan for a well-qualified borrower.