It’s typically difficult to receive an FHA loan, which is a government-backed mortgage insured by the U.S. Federal Housing Administration. FHA loans are typically geared toward new homeowners who can only afford a smaller down payment than what is required by conventional financing options.
If you do qualify, it could be a worthwhile way for you to get the mortgage process going. You’ll have to jump through a few more hoops compared to traditional conventional mortgage financing, but there are significant perks to an FHA mortgage.
The Best Mortgage Lenders for FHA Loans:
What is an FHA Loan?
The FHA program was established during the Great Depression (at a time when foreclosures and default rates rose sharply) to provide lenders with adequate insurance. Some programs were subsidized by the government, but the mortgage insurance premiums were designed to make the program self-supporting. Eventually, private mortgage insurance (PMI) companies were developed to insure lenders, and FHA loans now primarily serve borrowers who have poor or limited credit history in addition to difficulty coming up with a full down payment.
Lower down payments are normally viewed as riskier, but FHA loans are insured by the Department of Housing and Urban Development (HUD) to reduce risk. If you receive an FHA home loan, you’ll be required to pay two-part mortgage insurance in addition to monthly payments for risk compensation.
FHA loans allow borrowers to put as little as 3.5% down and receive up to 6% toward closing costs. Some lenders may limit seller contributions to 3% toward closing costs. If you have little to no credit history, a qualified non-occupant co-borrower can co-sign for your loan.
The co-signer is not required to be a blood relative.
FHA loans allow for gifts to be used for down payment sources as follows:
- Your relative
- Your employer or labor union
- A close friend with a clearly defined and documented interest in you
- A charitable organization
- A governmental agency or public entity that has a program providing home ownership assistance
Types of FHA Loans
- Fixed-rate FHA loan: Benefits you if you’d like to purchase a home but don’t have much saved for a down payment.
- Adjustable-rate mortgage (ARM): Designed for low and moderate-income individuals if you’re trying to transition into homeownership.
- FHA secure refinance loan: If you have an adjustable-rate mortgage, you could find yourself in financial trouble because of rising interest rates. An FHA-secure refinance can help avoid the threat of foreclosure.
- FHA reverse mortgage: Designed for homeowners age 62 and older, it allows the borrower to convert equity into a line of credit.
- Energy-efficient mortgage: A program to help current or potential homeowners significantly lower their monthly utility bills and incorporate the cost of energy-efficient improvements into the mortgage loan.
- Graduated payment mortgage: Designed for homebuyers who currently have low to moderate incomes but expect them to increase over the next five to 10 years.
- Growing equity mortgage: Allows borrowers who currently have limited income but expect income to increase. Allows a home purchase with payments that start small and gradually increase over time.
- FHA loans for condominiums: Condo loans for the purchase of housing units in a condominium building.
Pros and Cons of FHA Loans
|Low down payment: Conventional loan financing requires 20% down to avoid paying PMI (private mortgage insurance). An FHA loan down payment is only 3.5% (10% for lower credit scores).||Mortgage insurance: FHA requires a two- part mortgage insurance: 1.75% of the loan amount at closing and 0.85% of the loan amount paid annually for the life of the loan. Conventional financing PMI is typically 0.15% to 1.95% of the loan amount annually but only until the loan-to-value reaches 78% and the fee is discontinued.|
|Lower credit score: Conventional financing minimum of 640. FHA loan credit score minimum of 580 (lowest credit score) with 3.5% down or 500 to 579 minimum with 10% down.||Not all houses qualify for FHA loans: The property must pass an inspection to ensure the home meets the minimum standards to protect the health and safety of the occupants and is structurally sound. This decreases the chance of new homeowners needing to conduct significant repairs or renovations. These costs could increase the risk of foreclosure.|
|Lower debt-to-income ratio: Conventional financing maximum DTI is typically 43% but FHA loan can approve up to 50% DTI.||Loan limits: FHA publishes loan limits annually. The national loan limit for one-unit homes is $314,817 for 2019.|
How to Qualify for an FHA Loan
A list of documentation and qualifications must be met in order to be approved for an FHA loan. Review the FHA loan requirements below to ensure your eligibility. You’ll need:
- A minimum credit score between 500 and 579 with 10% of the purchase price as a down payment or 580 minimum credit score with a 3.5% down payment. (For a loan of $100,000, a 3.5% down payment would be $3,500.)
- A maximum debt-to-income ratio of 50%: To calculate DTI, add together all current monthly debt payments plus the new mortgage payment obligation divided by gross monthly income and multiply by 100 to get the percent ratio. Taxes, homeowners insurance and mortgage insurance monthly costs must be included in the DTI calculations. Compare homeowners insurance options to be sure to get the best rate.
- An appraisal by an FHA-approved appraiser.
- A home inspection by an FHA-approved inspector.
- Mortgage insurance (MIP): 1.75% of the loan amount due at closing and 0.85% of the loan amount annually for the life of the loan.
- Steady employment and the ability to prove income with most recent two paycheck stubs and most recent W-2.
- To provide your last three years of tax returns.
- To prove two years of employment history.
- To be at least 18 years old.
- To occupy the home as a primary residence.
- To factor in student loan payments into the DTI ratio (if in deferment, calculate 1% of the balance as the payment).
- Your most recent two bank statement that shows seasoned funds (90 days in an account) for down payment and closing costs.
- To obtain HUD housing counseling.
Begin the Application Process
First, you’ll need to find an FHA approved lender and complete a loan application to obtain pre-approval. (It’s advisable to complete an application without a property address.) A pre-approval will assist in determining the loan amount and purchase price that best fits your budget.
If you’re eligible, the FHA lender will provide you with a pre-approval letter, which you can provide to realtors to demonstrate your buying power. To help you see how much house you can afford, use an FHA loan calculator vs a reverse mortgage calculator.
The Best Mortgage Lenders for FHA Loans
1. Quicken Loans®: Best Overall
Quicken Loans® offers digital tools backed by award-winning customer service. Its speedy processing helps borrowers get into homes sooner rather than later.
Quicken Loans® offers low APR financing, which includes all the fees associated with a mortgage, including mortgage insurance. It also offers conventional and VA mortgages.
2. Carrington Mortgage Services: Best for Low Credit Scores
Carrington Mortgage Services offers many products for borrowers with low credit scores, including FHA mortgages. The company works with credit scores as low as 500.
Carrington Mortgage offers FHA, VA, USDA and conventional mortgages. It also offers proprietary programs to help first time buyers and buyers who have had financial challenges.
3. Guild Mortgage: Best for Education
The mortgage process can be intimidating. If you’re curious about what to expect, Guild Mortgage offers a wealth of resources.
It offers several calculators to help you explore different scenarios and mortgage options.
Guild Mortgage offers FHA, VA, USDA and conventional mortgages as well as special programs for nontraditional credit histories.
4. Bank of America: Best for First-Time Home Buyers
Bank of America is an excellent choice for first-time homebuyers. It has branches across the country so it’s easy to talk to a loan officer in person.
Do you want to meet in person for education and guidance?
If so, Bank of America is a great choice. You can start the mortgage process online or in person, whichever you prefer. Bank of America offers FHA, VA and conventional mortgages as well as proprietary mortgage products.
5. Fairway Independent Mortgage Corporation: Best for Mobile
Fairway Independent Mortgage Corporation offers a wide range of mortgage products, including FHA, VA, USDA, conventional and jumbo mortgages.
Its FairwayNow mobile app really sets it apart.
You can do every step of the mortgage process through the mobile app. You can upload documents, talk to a loan officer and see live status updates on your phone.
6. Veterans United: Best for Service Members
If you’ve logged some time in the military, Veterans United’s loans will likely be the best deal. Unlike other veteran-marketed loan programs, Veterans United only accepts active duty and veteran military members.
In addition to no-down-payment loans, you’ll also eliminate the private mortgage insurance you’ll have to pay with other mortgages.
Veterans United is also more forgiving of lower credit scores. Interest rates are lower than average.
Of all the home loan types, an FHA could be the right loan for you. When looking at a conventional loan vs FHA, it has many advantages. If you’d like to become a new homeowner or you have poor credit, an FHA loan can be a clear path to owning a home.
HUD housing counseling can also provide valuable insight into a mortgage loan and what to expect as a new homeowner.
Frequently Asked Questions
1) Q: How do I get pre-approved?
First, you need to fill out an application and submit it to the lender of your choice. For the application you need 2 previous years of tax returns including your W-2’s, your pay stub for past month, 2 months worth of bank statements and the lender will run your credit report. Once the application is submitted and processed it takes anywhere from 2-7 days to be approved or denied. Check out our top lenders and lock in your rate today!
2) Q: How much interest will I pay?
Interest that you will pay is based on the interest rate that you received at the time of loan origination, how much you borrowed and the term of the loan. If you borrow $208,800 at 3.62% then over the course of a 30-year loan you will pay $133,793.14 in interest, assuming you make the monthly payment of $951.65. For a purchase mortgage rate get a quote here. If you are looking to refinance you can get started quickly here.
3) Q: How much should I save for a down payment?
Most lenders will recommend that you save at least 20% of the cost of the home for a down payment. It is wise to save at least 20% because the more you put down, the lower your monthly payment will be and ultimately you will save on interest costs as well. In the event that you are unable to save 20% there are several home buyer programs and assistance, especially for first time buyers. Check out the lenders that specialize in making the home buying experience a breeze.
Get Ready for Take Off
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You can work at your own pace and someone is always there to answer your questions — 24 hours a day, 7 days a week. Want a fast, convenient way to get a mortgage? Give Rocket Mortgage® a try.