If you’re looking to buy your dream home but don’t have enough saved for a down payment, you’re not alone. One of the biggest challenges many homebuyers face is saving for a substantial down payment. Fortunately, there are several loan options available to help you achieve homeownership sooner, including FHA loans.

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However, not every loan is suitable for everyone, especially if you have existing debt or a low credit score. This is where FHA loans can be an excellent option, particularly for first-time homebuyers or those with less-than-perfect credit.

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In this article, we’ll explore FHA home loans: what they are, their requirements, and whether an FHA loan might be right for you.

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What is an FHA Loan?

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Did you know the U.S. Federal Housing Administration (FHA) is the world’s largest residential mortgage insurer? FHA loans are insured by the FHA, enabling lenders like banks, credit unions, and private mortgage companies to offer home loans with low down payment requirements. While FHA loans provide flexibility, borrowers are required to pay premiums for the insurance that protects lenders.

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With an FHA loan, qualified buyers can purchase a home with as little as a 3.5% down payment. These loans allow applicants to qualify with more flexible credit and income requirements compared to conventional loans.

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FHA Loan Requirements

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Both first-time and repeat homebuyers can take advantage of FHA loans, particularly due to the lower down payment and easier credit qualification compared to conventional loans. However, FHA loans have specific requirements:

• The home must be appraised by an FHA-approved appraiser and meet the necessary property standards.

• The property must be a primary residence, not a second home or investment property.

• The borrower must occupy the property as their primary residence within 60 days of closing.

• A mandatory inspection must ensure the property meets FHA’s minimum standards.

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FHA Loan Down Payments

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The minimum down payment required for an FHA loan depends on the borrower’s credit score.

• A down payment of 3.5% is required for borrowers with a credit score of 580 or higher.

• For borrowers with credit scores between 500 and 579, a 10% down payment is required.

It’s important to note that all down payment funds must come from FHA-approved sources, such as personal savings or gifts.

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Mortgage Insurance

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FHA borrowers must pay a Mortgage Insurance Premium (MIP) to protect lenders in case of default. MIP is required for the life of the loan unless a 10% down payment was made, in which case MIP is required for 11 years.

 

Additionally, borrowers pay an upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount at closing.  The annual mortgage insurance premium (MIP) ranges from 0.45% to 1.05% depending on the loan size and term.

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FHA Loan Limits

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FHA loan limits vary by county and property type. For 2024, the national loan limit for one-unit properties ranges from $472,030 (floor) to $1,089,300 (ceiling) in high-cost areas. These limits are set by the U.S. Department of Housing and Urban Development (HUD) and can be checked on their website or by consulting a HUD-approved housing counselor.

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FHA Loan Credit Score Requirements

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Your credit score impacts your eligibility for an FHA loan. A higher credit score allows for better terms, such as lower down payments and interest rates.

• The FHA generally allows a Debt-to-Income (DTI) ratio of up to 56% when approved through automated underwriting.

• However, some borrowers may be limited to a DTI of 43%, depending on their specific financial profile.

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FHA Income Requirements

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While the FHA doesn’t set a minimum income, borrowers must demonstrate a stable income and employment history.  A two year history of employment and the same amount of income is considered stable.

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The Bottom Line on FHA Loans

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FHA loans are:

• Government-insured loans that allow borrowers to purchase a home with as little as a 3.5% down payment.

• Ideal for those with lower credit scores or limited funds for a down payment.

• A great option for those with higher monthly debt needing a little more leniency on debt to income ratios.

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Navigating the homebuying process can be overwhelming, but we’re here to make it easier. Contact us today to explore your FHA loan options and get started on your path to homeownership.