What Is an FHA Loan?

When you decide you’re ready to buy a home, you don’t just shop around for different types of houses – you’ll typically want to shop around for several types of loans, too. Your home-buying needs are going to be unique to your situation, so it’s important that you find a home loan that’s tailored to them. There’s no shortage of options out there, and plenty of factors you’ll want to take into account regarding what kind of commitment you can make. And for first-time home buyers, it can all be a little overwhelming. 

But your home buying experience can, in fact, be a dream come true instead of a financial headache. FHA loans are a good option for several reasons, especially for first-time home buyers or home buyers who might have difficulty qualifying for a private loan. We’ve broken down the basics of what an FHA loan is and what you need to qualify for one. Arkansas Federal Credit Union’s team of home loan experts can talk you through the process on a personal, step-by-step level.

FHA Loan Basics

An FHA loan, or Federal Housing Administration Loan, is a loan that is backed by the Federal Housing Administration. This means that the loan is insured by the federal government, and the owners of the mortgage (your lender) will be protected against loss if you default on your loan. 

With an FHA loan, a home buyer can borrow a certain percentage of their home’s value depending on their credit score. If you have a credit score at or above 580, you should be able to borrow up to 96% of the home’s value. Borrowers with lower credit scores can qualify for an FHA loan, but they will have to make a larger down payment.

Benefits of FHA Loans

The reason so many people choose FHA loans? The benefits and protections they offer.

FHA loans are designed primarily for people who may not be able to obtain a private loan, so compared to other types of loans, FHA loans require lower credit scores to qualify. This can be helpful for home buyers with low credit or even no credit. Those who have filed for bankruptcy or suffered a foreclosure can even qualify for an FHA loan, so long as they meet the other requirements set by the FHA such as reestablishing good credit and maintaining a consistent payment history.

And if mortgage interest rates are intimidating? That’s something an FHA loan can help with. FHA loans often have lower interest rates, so housing payments can be more affordable. The lender can also accept a lower down payment because the loan is backed by the FHA.

What Is Required for an FHA Loan?

Both the Federal Housing Administration and lenders have certain guidelines borrowers must meet to qualify for an FHA loan. When you apply for an FHA loan, you’ll need to make sure your situation fits the following criteria:

• The home you’re buying must be FHA approved.
• The home must be your primary residence. You cannot get an FHA loan for an investment property.
• You must occupy the home within six days of purchasing it.
• The loan requires a home inspection, which will report whether the home meets the minimum property standards. Safety, security, and soundness all play into whether the home will be deemed livable and move-in ready.

What Is Needed for an FHA Loan?

Down payment amounts for FHA loans are directly related to your credit score, so what you’ll be required to pay will vary. With a credit score of 580 or higher, a 3.5% minimum down payment is required. With a credit score between 500 and 579, a 10% minimum down payment is required.

For all FHA loans, regardless of your down payment size, you’ll pay a mortgage insurance premium (MIP), which is like private mortgage insurance. A MIP is a kind of insurance that protects the lender if the borrower defaults on their loan. You’ll pay the MIP for the life of the loan unless you paid at least 10% on the down payment, in which case you’ll only pay the MIP for 11 years.

FHA loan borrowers must also have a debt-to-income (DTI) ratio of less than 43%, meaning that less than 43% of their gross monthly income should go towards debt payments, as well as a steady income and proof of employment.

Apply for an FHA Loan Today!

FHA loans are a great option for purchasing a home in all kinds of situations. Whether you have a high credit score but don’t have much for a down payment, or you’re ready to buy a home but need to work on your credit score, an FHA loan can be a pathway to home ownership. Ready to take the next step, but not sure where to get started? Our team of home loan experts can help explain the process, explore your options, and find the loan that will work best for your goals.

Start your home buying journey by applying for a FHA loan with Arkansas Federal toda