An FHA loan is a mortgage that is insured by the Federal Housing Administration. These loans are designed for people who are unable to make a large down payment. A borrower must have a credit score of 600 or higher to qualify for an FHA loan for a mortgage with a down payment as low as 3.5%. If you think you may be eligible for an FHA loan, this article will go into more detail about how they work and what are some of the requirements.

How Do FHA Loans Work?

A borrower has to have mortgage insurance for an FHA loan to be approved. The two types of mortgage insurance premium (MIP) that are required for an Upfront Mortgage Insurance Premium (UFMIP) and an Annual MIP. You can finance the UFMIP at 1.75%; the monthly mortgage insurance is 0.85%. The upfront MIP is paid at the time of closing, and the annual MIP is paid monthly. These payment amounts can vary depending on the loan amount and length. There are many benefits of FHA loans, and one immense benefit is that the seller, builder, or lender is allowed to pay some of the closing costs associated with the purchase of a home.

FHA Loan Requirements

There are additional lending requirements for FHA loans. One requirement is that the borrower must have a steady employment history. The borrower’s payment to income ratio is required to be less than 45%, and the debt to income ratio should be from 50-57% depending on the client’s credit profile. Borrowers who are self-employed need to show two years of tax returns and a profit and loss statement.

Another requirement is that borrowers must be out of bankruptcy for at least two years. Furthermore, borrowers must be able to demonstrate they were working towards re-establishing good credit.

Lastly, the FHA board must approve of the lending institution the borrower is using. This is because borrowers don’t receive the money from the FHA. Instead, they receive the money through the lender, and the FHA guarantees the loan. Because of this, lenders have flexibility in setting their standards for determining eligibility.

FHA loans are not for everybody. No one loan is the same, depending on a borrower’s credit score and down payment options. With that in mind, it’s important to do your research when you’re looking into home loans to figure out which one is right for you.