What is an FHA loan?

An FHA loan is a loan insured against default by the FHA (Federal Housing Administration). The FHA guarantees that a lender won’t have to write off a loan if the borrower defaults – the FHA will pay. The guarantee helps lenders confidently make certain mortgage loans.

What are the advantages?

• Low down payment -- as small as 3.5%.
• Low minimum credit score requirement – 640 FICO
• Seller may contribute up to 6% towards recurring or non-recurring closing costs
• Non-occupant co-borrowers OK
• Can be 1 year out of Chapter 13, 2 years out of Chapter 7, and 3 years out of Foreclosure
• No prepayment penalty (a big plus for subprime borrowers)
• “Streamline” refinances -- from existing FHA loans -- usually require no appraisal, income documentation, credit check, or employment verification.

Who can get an FHA loan?

With an FHA loan, there are no income limits, but there are limits on how much you can borrow (up to $625,000, depending on where you live). You don’t need to have perfect credit - - just decent credit (a 580 score). You need to have reasonable debt-to-income ratios (usually your mortgage must be less than 31% of your gross income, and payment on all debts must be less than 43% of gross, but higher amounts are allowed in certain situations).

Other things to know.

FHA home loans have a rigid mortgage insurance structure. With most loans exceeding 80% of the value of your home, you have to pay PMI (private mortgage insurance). With FHA loans, you’ll pay 1.5-1.75% up front, and you’ll pay 0.50-0.55% annually (paid monthly). You must pay this insurance premium on your FHA home loan for 5 years – even if you build sufficient equity in your home.