Financing a Home: What Is an FHA Loan?

A Federal Housing Administration (FHA) loan is a form of financing for home buyers. There are guidelines and requirements in order to qualify for this type of financing.

An FHA mortgage loan is designed for home buyers with low to moderate income and are looking to purchase their first home, according to the federal agency. FHA loans are issued by lenders that meet federal qualifications. The loans are insured, in the event of a default, by the Federal Housing Administration

The loans help people who would not normally be able to buy a home with a big down payment. With an FHA loan, a buyer only has to have a three and a half percent down payment, and these funds can come from a gift or grant, as reported by Investopedia.

FHA loans are designed to give a lender some reassurance on loans it might not otherwise approve, according to the FHA. If a borrower defaulted on the loan, the loan is federally insured through the FHA and would be assumed by the administration. The FHA then handles the default and foreclosure process.

Who Qualifies for an FHA Loan?
Home buyers who would not normally qualify for a standard mortgage loan might qualify for an FHA loan. The following are some of the stipulations to determine if someone qualifies for this type of loan, according to the FHA.:

  • An individual's credit score can be as low as 500 to buy a home under FHA guidelines. However, having a score under 580 changes the amount of down payment needed. Anyone under a 580 credit score will need to have a 10 percent down payment.
  • If a borrower doesn't have a credit history, alternative non-traditional payment history can be used. Some forms of non-traditional credit include rent payments and monthly utility payments.
  • If a person looking to buy a home has had a foreclosure or bankruptcy in the past, he or she can still qualify for a home loan through the FHA.

FHA Loan Requirements
An FHA loan has a checklist of requirements and guidelines that must be followed in order for a loan to be approved. The following are some of the requirements that must be met, as stated by the agency:

  • Mortgage insurance is required on all FHA loans. There are two different kinds of mortgage insurance payments that need to be made by a home buyer. There is an upfront mortgage insurance premium (UFMIP), which is included in the closing costs on the home. The second is an annual mortgage insurance premium (MIP) which is rolled into the monthly mortgage payment.
  • The employment history for an FHA borrower requires two years of steady employment with the same employer or, in some cases for self-employed borrowers, the same field of work, as reported by Investopedia.
  • A borrower's debt to income ratio can't exceed 31 percent, or in some cases, 40 percent, of gross income. A debt to income ratio is the percentage of a borrower's income that goes toward paying monthly debts.
  • For borrowers who have had a bankruptcy, the bankruptcy has to be discharged for at least two years to qualify. For those that have a past foreclosure, it must be at least three years prior. In both circumstances, the borrower must show he or she is working at rebuilding his or her credit history, according to the FHA.
  • Borrowers who have delinquent income taxes or federal student loans will not qualify for an FHA loan.