Government-insured mortgages can help first-time home buyers with less-than-perfect credit.
There are no income level requirements for FHA loans
You’ll pay a mortgage insurance premium for 11 years or the entirety of your loan
An FHA loan is a home loan insured by the Federal Housing Administration. Since it is insured by the government, FHA loans have lower down payments and credit requirements compared to conventional loans. When you get an FHA loan, the money won’t come directly from the government, but from a government-approved lender.
As of 2019, borrowers only need a minimum FICO score of 580 to qualify for an FHA loan with a down payment as low as 3.5% of the home’s purchase price. However, despite generous terms, loans originated after 2013 with smaller down payments require that you pay an insurance premium for the entirety of the loan. The upper loan limits for FHA loans are $726,525 for high-cost areas.
As such, FHA loans are typically the choice of low-to moderate-income borrowers with little cash on hand, or first-time buyers with less-than-perfect credit when it comes to financing options for home.
Loans insured by the Federal Housing Administration are similar to the conventional loans in many ways. Both offer options regarding interest rates, loan terms, and loan amounts.
The mortgage limits are set by the Federal Housing Financing Administration (FHFA). Conforming loans (as opposed to jumbo or non-conforming loans) fall within those limits and meet the guidelines set by Freddie Mac and Fannie Mae.
You can use an FHA loan for single-family houses, homes in one- to four-unit buildings, and some manufactured and mobile homes.
If you’re fixing up a home or buying an energy-efficient home, you may want to apply for different type of FHA loan. We’ll discuss other types of government-backed loans later.
At a glance, here are some features of FHA loans vs conventional loans.
|FHA loans||Conventional loans|
|Loan limit (low-cost areas)||$314,827||$484,350|
|Loan limit (high-cost areas)||$$726,525||$726,525|
|Credit score minimum||500-580||620 for fixed-rate mortgages; 640 for adjustable-rate mortgages (ARMs)|
|Down payment||3.5% to 10%||3% for fixed-rate mortgages; 5% for ARMs; at least 20% to avoid PMI|
|Interest rate||Fixed, adjustable||Fixed, adjustable|
|Loan term||10, 15, 20, 30 years||Five to 30 years|
|Mortgage insurance||1.75% upfront MIP; 0.45% to 1.05% annual MIP||Varies, but about 0.5% to 1% PMI|
Most people will not be able to buy a house in cash and will instead apply for a mortgage, which is a loan specifically intended for the purchase of a home and is paid over time.
Your mortgage amount is typically the price of your house minus the down payment, a lump sum that you pay up front. With a conventional loan, the down payment requirements for a home are typically 20% of the home purchase price. That means if you’re purchasing a $250,000 home, you need to pay down $50,000 at the time of closing.
If 20% of the purchase price seems like more than you can afford, a FHA-insured loan can be of help. It’s backed by the government, which has two important consequences:
Mortgage insurance premiums (MIP) are functionally the same as private mortgage insurance (PMI). Both of these are payments required by lenders if your down payment is less than a certain percentage. In case the of conventional mortgages, the insurance premium protect the lender in case you stop making payments or default on your loan. For FHA loans, the payments are more like a fee to the government for backing your loan as they don’t exactly need protection.
With an FHA loan, you’ll pay an Upfront Mortgage Insurance Premium (UFMIP) and an Annual Mortgage Insurance Premium (MIP). As of 2019, the UFMIP is 1.75% of your loan amount. The Annual MIP is anywhere from 0.45% to 1.05% of your loan amount, depending on your loan amount and term. Annual MIP is typically factored into your monthly payment.
While this insurance premium might be more than the PMI for conventional loans, remember that you can deduct your monthly mortgage interest payments from your taxes. Learn more about claiming the mortgage interest tax deduction.
You can cancel your MIP under certain circumstances depending on your loan-to-value ratio.
If you bought a $250,000 home with a $240,000 FHA-insured loan, your LTV would be 96%.
If your LTV is over 90%, you will make MIP payments for the life of your loan. If the LTV under 90%, you can cancel MIP after 11 years.
For loan terms 15 years or less:
|$625,500 or less||90% or less||0.45%||11 years|
|More than 90%||0.70%||Mortgage term|
|More than $625,000||78% or less||0.45%||11 years|
|> 78% ≤ 90%||0.70%||Mortgage term|
|More than 90%||0.95%||Mortgage term|
For loan terms longer than 15 years:
|$625,500 or less||90% or less||0.80%||11 years|
|> 90% ≤ 95%||0.80%||Mortgage term|
|More than 95%||0.80%||Mortgage term|
|More than $625,000||90% or less||1%||11 years|
|> 90% ≤ 95%||1%||Mortgage term|
|More than 90%||1.05%||Mortgage term|
While there are no minimum or maximum income restrictions for those seeking FHA loans, there are other eligibility requirements, including:
There are also requirements for the property, which include the following:
When it comes time for the down payment, it can come from your savings or a grant. You can also pay for the down payment with a gift from a family member, for which you'll need a gift letter.
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Elissa is a personal finance editor at Policygenius in New York City. She writes about estate planning, mortgages, and occasionally health insurance. In the past she has written about film and music.
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