An FHA loan is a mortgage insured by the Federal Housing Administration, which is part of the U.S. Department of Housing and Urban Development. FHA loans are helpful for buyers with limited savings or lower credit scores.
Here are some characteristics and benefits:
- Credit Score – Most cases, you will need a credit score of at least 620 to qualify for an FHA loan.
- Down Payment – You may qualify to buy with a minimum down payment of 3.5%.
- Mortgage Insurance Premium (MIP) – All FHA loans require mortgage insurance. FHA mortgage insurance is built into every loan.
- Your FHA loan MIP will involve two payments: an upfront premium and an additional annual payment. The amount you pay for both depends on your loan amount.
- The MIP upfront payment will be equal to 1.75% of the total value of your loan. For example, if you borrow $175,000 for your mortgage, you will make an upfront payment of $3,062.50. Your upfront MIP can be added to the balance of the loan. The upfront payment is only due once unless you refinance or take on another FHA loan in the future.
- If your down payment is less than 10%: You will pay FHA mortgage insurance for the life of the loan.
- If your down payment is 10% or more: You will pay FHA mortgage insurance for 11 years.
- Debt to Income Ratio (DTI) – Your debt-to-income ratio (DTI) is a percentage that represents how much of your monthly income goes to pay off debts. You can calculate your DTI by adding up the minimum monthly payments on all your debts (i.e., auto loans, credit cards, installment loans, etc.) and dividing it by your gross monthly income.
- Interest Rate Terms – There are two most common types of rate terms which are fixed-rate and adjustable-rate, or ARM. Both fixed-rate and adjustable-rate mortgages (ARMs) are available.
- In a fixed-rate mortgage rate, the initial interest rate remains the same for the life of the loan.
- In an adjustable-rate mortgage or ARM, the interest can fluctuate with the market following an initial fixed-rate period.
- Your interest rate will largely depend on your credit score and overall credit history.