FHA loans—short for Federal Housing Administration loans—are designed to help low- and moderate-income individuals attain a mortgage and buy a home. FHA loans are backed by the government, which guarantees that the lender won't be left high and dry if the borrower defaults. As such, FHA loans go to home buyers who might not ever qualify for a mortgage through conventional means. Here's what you need to know about Federal Housing Administration loans and how they can help you.
1. You don't need a large down payment
FHA loans typically require a very low down payment—only 3.5%—which makes them attractive to many borrowers. For years, these loans had the lowest down payment options.
Now, the FHA is no longer the only loan-backer on the market offering low down payments. Freddie Mae and Freddie Mac also began a new low-down payment program with down payments as low as 3%. For most other loan programs, lenders require down payments of up to 20%.
Most FHA loans are fixed-rate loans, typically 30-year and 15-year fixed-rate mortgages.
2. You can qualify with a low credit score
The Federal Housing Administration was started in 1934, when foreclosures spiked all over the country—and many people were left in credit ruin.
So in addition to low down payments, the FHA gives greater flexibility with debt and creditworthiness. Mortgage rates are typically lower than conventional loans, and qualifying credit scores do not need to be as high: For FHA loans, qualifying credit scores start at 580.
Unlike conventional loan programs, FHA loans also allow down payments and closing costs to be funded through gifts or grants.
3. Limits on FHA loans are higher
Federal Housing Administration loan limits vary by county. High-income areas, which have higher property values, can receive bigger mortgages. To find out an FHA loan limit for your area, go to the HUD.gov’s FHA mortgage limits webpage.
These loan limits are higher than they used to be during the early- and mid-2000s, when home prices were soaring. Back then, FHA limits were usually too low for borrowers to use them.
After the boom, the limits were raised, making the program more widely available.
4. Help for distressed borrowers
The program has also taken steps to help FHA borrowers hit hard by the nation’s economic downturn. For example, the Helping Families Save Their Home Act of 2009 gave FHA borrowers more options to avoid foreclosure and increase credit.
Even renters got some help—under the new law, if a renter’s house were to be foreclosed upon, the bank must honor the existing lease or give 90 days notice for month-to-month renters.
In early 2010, the federal government announced that homeowners with FHA-insured loans who had cash flow issues were eligible for loss-mitigation assistance.
Unemployment, reduced working hours, lower pay or a drop in self-employed business earnings may enable FHA-insured borrowers to qualify for aid. Previously, homeowners were not eligible for assistance until after they had fallen behind in their payments.