An FHA loan is a mortgage insured by the Federal Housing Administration and issued by a bank. It requires a lower minimum down payment than other conventional loans and is a good fit for first-time buyers and people with little savings. You can get an FHA loan with a low credit score and limited down payment. Its flexible standards make it an ideal loan to buy a home.
This article covers how an FHA loan works, what its types and requirements are, and how you can apply for it. You can get answers to all your questions about an FHA loan here.
How an FHA Loan Works
As stated above, FHA loans require a minimum down payment that can come from your savings. You can borrow up to 96.5% of the home’s value with an FHA loan if you have a credit score of at least 580. This means the required down payment is only 3.5%.
Types of FHA Loans
FHA loans offer you a variety of options with different eligibility requirements. Below are some common types of FHA loans.
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Basic Home Mortgage Loans: These are standard single-family loans backed by FHA, and only primary residents qualify for them.
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FHA Refinance Loans: If you want to refinance your FHA loan at the lower interest rate or get cash flow for costly projects like home renovations, you can use these options:
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FHA streamline finance
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FHA cash out finance
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FHA rate and term finance
What are FHA Loan Requirements
The FHA sets minimum requirements for borrowers who are seeking FHA loans. For an FHA mortgage application, you have to meet certain conditions regarding your credit score and debt-to-income ratio. However, each FHA-approved lender also specifies some standards that are in line with the FHA.
The minimum credit score required for an FHA loan is 500. If your credit score is between 500 and 579, you are eligible for an FHA loan, but you must make a down payment of at least 10%. However, if your score is above 580 or higher, you can easily qualify for a down payment as low as 3.5%.
How to Secure the FHA Appraisal
The property you buy with an FHA loan has to undergo an appraisal from the Federal Housing Administration to ensure it meets basic safety and livability standards.
FHA appraisal is different from the home inspection. Its goal is to ensure the home is a good investment and worth what you are paying for.
FHA Loan Limits
For every type of FHA loan, there are limits on how much mortgage amounts you can borrow. Regions with lower-cost areas have lower limits, and regions with higher-cost areas have higher limits.
How to Apply for FHA Loans
You can apply for an FHA loan directly with the bank or any other lender of your choice. To apply for an FHA loan, you require some personal and financial documents, including a valid social security number and bank statements for the past 30 years.
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