FHA Loan - Oakstar Funding

FHA Loans

An FHA loan is a mortgage that is insured by the Federal Housing Administration (FHA). These loans offer lower down payments and have less stringent credit requirements. These loans are extremely popular with first time homebuyers because they are easier to qualify for.

What is an FHA loan?

A Federal Housing Administration (FHA) loan is a government-backed home mortgage loan. This program was created to help make home loans more accessible for American families. Because the government insures the loan against default, lenders are willing to offer these loans with more flexible credit standards.

FHA mortgage interest rates may be lower than conventional loans but borrowers will have to pay monthly mortgage insurance premiums(MIP). FHA loans come in 15, 25, and 30 year options.

FHA Mortgage Insurance Premium (MIP)

FHA loans are easier to qualify for, and therefore riskier for lenders. To mitigate that risk, FHA loans include Mortgage Insurance which protects the lender if the borrower were to default. That monthly insurance premium has an initial upfront collection and also is added to your monthly mortgage payment for the life of loan for most FHA loans.

Considerations for an FHA Mortgage:

Down Payment

An FHA mortgage may offer a down payment as low as 3.5 percent. This is appealing to first-time borrowers or those who don’t have a lot of cash to bring to closing. There are Conventional Mortgage options with down payments as low as 5%, so be sure to weigh all factors before deciding which loan type is right for you.

Credit Qualifications

Although FHA does not have a credit score requirement most lenders have their own guidelines. It is possible to qualify for an FHA mortgage with a credit score as low as 580. Conventional mortgages require a minimum credit score of 620. FHA mortgages also accept borrowers with higher Debt to Income Ratios allowing an approval as high as a 56.99% DTI ratio.

Mortgage Insurance is Required

Most FHA Loans include an upfront mortgage insurance payment and a monthly insurance premium for the life of the loan. This will add to your monthly mortgage payment. While conventional loans with less than 20% down also require mortgage insurance, this insurance can be removed after you acquire 20% equity.

FHA home loan requirements and qualifications:

Loan Amount – FHA loan limits vary by county, but the baseline limit for 2022, which applies to most single family homes, is $420,680. You can check the HUD website for a complete list by county.
Down Payment – An FHA loan requires a minimum down payment of 3.5 percent. FHA guidelines allow those funds to be gifted to the borrower from an approved source such as a relative or close friend.
Primary Residence – FHA loans can only be used for your primary residence. They are not intended for secondary homes or investment properties.
Minimum Property Standards – Homes must meet specific safety, security, and soundness standards to qualify for an FHA loan. Other loan options are available for properties in need of repair such as the FHA 203(k) loan.

Choosing the right mortgage is about looking at your individual situation. An FHA mortgage may be right for you if your credit does not meet the requirements for a conventional loan, or if you have limited cash for a down payment. The OakStar team can help you compare your options and find the mortgage solution that meets your needs.