Federal Housing Administration (FHA) Loan
FHA Loan Definition
These loans are made by traditional lenders, like banks or credit unions, but are insured by the government, meaning individuals who could not otherwise afford or get a mortgage for a home can purchase a home to live in.
FHA Loan Requirements
FHA loans help buyers purchase a home because they require:
- A lower down payment: Only 3.5% of the home value is required, compared to the traditional 10-20%. This down payment can also be a gift, something limited in traditional mortgages.
- A lower credit scores to qualify: Individuals with credit scores as low as 500 can qualify, compared to the 620 credit score needed for a traditional loan, and
- A lower debt-to-income ratio: Traditional mortgages required that 50% or less of a person’s income be spent on paying off debt, while an FHA-insured loan only requires a debt-to-income ratio of 43%
FHA Loan Additional Costs
There is an additional cost to FHA loans, though.
Borrowers are required to pay an insurance premium called an Up-Front Mortgage Insurance Premium or UFMIP for short.
Ranging from .45% to 1.05% the original loan amount, the UFMIP premium is paid annually to the Federal Government as payment for insuring the loan.
It is paid for either 11 years or the life on the loan, depending on the term of the loan and the loan-to-value ratio.
Property Standards for FHA Loans
FHA loans also require that the property adhere to stricter standards of quality than traditional loans.
Specifically, there are detailed checklists that must be filled to ensure the home:
- Protects the health of the inhabitants,
- Protects the security of the property, and
- Does not have physical deficiencies affecting its structural integrity.
Federal Housing Administration Loan (FHA) FAQs
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.