This is a type of loan given to qualifying borrowers that is insured by the FHA (Federal Housing Administration) and originated by an FHA-approved lender. Designed for low-to-moderate income borrowers, the requirements are much lower than those of conventional loans. Borrowers can have lower credit scores and put less money down.
Under the 2020 FHA guidelines, you are able to borrow up to up to 96.5% of the purchase price. That means that borrowers are able to make a down payment as little as 3.5%.
Since this is a government-sponsored program, borrower requirements are less than those of conventional loans. To qualify for an FHA loan, and be able to put down 3.5%, you will need a credit score of around 600. The credit score can vary from lender to lender, with 600 being the median. People who have a credit score of less than 600 can still get an FHA loan, however will likely be required to make a larger down payment. Borrowers can get their down payment from family, savings or down payment assistance.
Borrowers that qualify for an FHA loan will be required to buy mortgage insurance, also often known as PMI. These premium payments will be made to the FHA every month. These premiums ensure that the FHA will guarantee your loan. The mortgage insurance causes the lender to take on less risk because the FHA will pay a claim to the lender in the case of default.
FHA loans come with many benefits. While many of the requirements for FHA loans are less strict that those of conventional loans, there are requirements for FHA loans that other types of loans are not subject to.
For example, the home you want to finance must be appraised by an FHA-approved appraiser. Unlike other types of loans, a borrower can only get an FHA loan if the home will be their primary residence. The borrower also must occupy the home within 60 days of closing. The home must be inspected and proven to pass the minimum property standards setn by the FHA.
The Federal Housing Administration was created during the Great Depression when the housing market was having major issues. Rates of default and foreclose had gone way up, and Congress had to come up with a solution, so they created federally-insured programs that would pose less risk to the banks, and make it easier for borrowers to qualify for loans. As a result, the amount of people who own their homes, instead of rent, rose steadily until the crash in 2008. As our recovery from the 2008 crash has continued, the U.S has seen continued growth in homeownership rates again, with the rate being 67.9% in the second quarter 2020.