FHA Loans

You are close to pre-qualifying for the home of your dreams

What You Need to Know About FHA Loans

FHA Loan

Purchasing a new property is easy for home buyers with enough money and good credit scores. But, this may not be the case for someone who can’t afford to spend thousands of dollars upfront. Whether you have low credit scores and not enough savings, you can still get your dream property with FHA loans.

If an FHA loan is still new to you, don’t worry, as this post will talk about all the nitty-gritty details about this type of loan. Thus, you can make an informed decision whether FHA loans are perfect for your needs.

Understanding an FHA Loan

FHA Loans refer to the money you borrowed from FHA (Federal Housing Administration). If your credit score is higher than 580, you can apply for an FHA loan with a 3.5 percent down payment. Since its affordable down payment, FHA loans became popular among potential property buyers with little savings and poor credit scores.

FHA loan is an ideal type of loan for individuals who are not qualified to avail of a home loan. One of the best things about FHA loans is that the Federal Housing Administration guarantees the mortgages issued by non-banks, credit unions, banks, Gold Star Mortgage Financial Group, and other lenders. Lenders are protected by this insurance when a loan default happens.

This is why FHA lenders offer loan terms and conditions favorable to borrowers. Ensure that you are dealing with an FHA-approved lender to avoid issues concerning your loans. For example, an FHA loan can be used for different purposes, such as refinancing or purchasing manufactured homes, condos, apartments, multiple-unit houses, and single-family homes.

Aside from that, FHA loans are divided into categories, wherein some can be used to finance the renovation of your current property or to fund a new home construction.

How The FHA Loan Started

In 1934, the most prolonged and most significant economic recession happened, which affected millions of families and even the government. That is why Congress approved the FHA loan to support economic growth.

During the Great Depression, the property industry has been in great trouble. The rise of foreclosure and default rates became notable. Because of that, many mortgage lenders raised their down payment rates by up to 50 percent, which only wealthy families can afford. That is why the rate of homeless households rapidly increased in the United States.

That is why the US government created the most affordable type of loan – the FHA loan. This is designed to let households borrow home mortgages even with low credit scores. Beyond that, it was also established to protect the lenders against such situations that happened in the 1930s.

The availability of FHA loans for all has increased the homeownership rate in the United States. In 2021, the current homeownership rate was 65.4 percent.

Who Are Qualified For FHA Loans?

Qualified For FHA Loans

Although an FHA loan needs a few requirements than conventional home loans, despite that, you still need to comply with all these requirements to approve your FHA loan application. Listed below are only the “minimum” requirements that FHA requires. But, take note that FHA-approved lenders may require you to submit additional documents.

Down Payment Funds

As mentioned earlier, you can avail of the 3.5 percent down payment rate only if your credit score is higher than 580. On the other hand, if your credit score ranges from 500 to 579, FHA will require you to pay the 10 percent actual purchase price.

The good thing is that you don’t need to pull out all this money from your current bank savings. FHA accepts gift money as your initial down payment. But, this is only applicable if the donor writes a letter containing the gift amount, your relationship with them, and their contact details. The letter should also include a statement that they will not ask for repayment.

Credit Score

If your current credit score is not below 500, you can use an FHA loan. However, you need to make higher down payments if your credit score is 579 and below. But take note that these guidelines are based on what FHA has been set. This means that lenders may require you to maintain higher credit scores before getting your approval for an FHA loan.

Debt-To-Income Ratio

To qualify for FHA loans, you must maintain your DTI (Debt-To-Income) ratio below 50. This means that your pretax income should be higher than your monthly debt payments. Your DTI ratio should include the number of debts you are not paying actively.

Mortgage Insurance

Each type of loan under FHA always comes with mortgage insurance. Once your FHA loan has been approved, you will automatically have an FHA mortgage. This means that you also need to pay a mortgage insurance fee per month.

If your down payment is lower than 10 percent, you need to pay your mortgage insurance fee until you fully pay your FHA loan. But, on the other hand, if your down payment is more than 10 percent, your FHA mortgage insurance payment will last for 11 years.

What Are The Different Types Of FHA Loans?

Types Of FHA Loans

Like conventional mortgages, an FHA loan is also divided into different types. And these are the following:

FHA Energy Efficient Mortgage

This FHA loan focuses on home upgrades designed to cut your electricity bills. These may include the installation of wind or solar energy systems or new home insulation.

FHA 203(k) Improvement Loan

This type of loan works similarly to FHA Energy-Efficient Mortgage. The money you will borrow under this loan can be used for particular home renovations and repairs. This is ideal for property owners who want to add home equity and purchase a fixer-upper.

HECM (Home Equity Conversion Mortgage)

HECM is an FHA loan beneficial for adults aged 62 and above. This loan allows seniors to turn their home equity value into money without affecting their home title. Seniors can take out the money through a credit line or a fixed monthly amount.


If you have a low credit score and not enough money to purchase or repair a property, you may consider applying for an FHA loan. This loan is more beneficial than conventional home mortgages because of different reasons. But remember, if you will use this type of loan, make sure to transact only with FHA-approved lenders.