Less severe lending standards and lower down-payment requirements make FHA loans popular among mortgage borrowers.
What is an FHA loan?
An FHA loan is a type of government-backed mortgage insured by the Federal Housing Administration, a branch of the U.S. Department of Housing and Urban Development, or HUD. FHA borrowers pay for mortgage insurance, which protects the lender from a loss if the borrower defaults on the loan.
Why homebuyers like FHA mortgage loans
Because they are government-backed, FHA home loans have attractive interest rates and less rigid qualifications. FHA loan applicants must meet credit-score and down-payment requirements, show proof of employment, and a steady income. An appraisal of the home by an FHA-approved appraiser also is required.
You don’t need perfect credit to qualify
Credit-score requirements for FHA loans depend on the down payment. For an FHA loan with a down payment as low as 3.5 percent, the borrower’s credit score must be 580 or higher.
Those with credit scores between 500 and 579 must pay at least 10 percent down.
Know your credit score before you borrow. People with credit scores under 500 generally are ineligible for FHA loans. The FHA does make allowances, under certain circumstances, for applicants with nontraditional credit history or insufficient credit if other criteria are met.
The minimum down payment is 3.5 percent
For most borrowers, the FHA requires only 3.5 percent of the purchase price of the home as a down payment. FHA borrowers can use their savings to make the down payment. Other sources of cash allowed for a down payment include a gift from a family member or a government grant for down-payment assistance.