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Everything Home Buyers Should Know About FHA Loans

An FHA loan is the preferred home loan for many first-time home buyers. With low down payment and credit score requirements, FHA loans make home buying possible for many Americans. But just what is an FHA loan and what do you need to know about it? Keep
reading to find out.

Is an FHA loan a government loan?

Yes and no. FHA mortgage loans are secured by the government, but they’re not actually administered by the government. This means that if you default on your payments, your mortgage lender is protected.

Lending requirements are a way to screen borrowers and select the ones least likely to default on payments. Many banks have extremely high standards that are unrealistic for the average American borrower. FHA loans effectively lower these requirements, but to lenders the risk is still there, which is why the government actively insures each FHA loan.

FHA loans are administered by banks, but each loan is insured by the government in case the borrower stops making monthly payments.

couple meeting with banker or lender

Do you still have to pay for mortgage insurance if it’s government insured?

Yes. You have to pay for both an upfront mortgage insurance as well as an annual mortgage insurance. The upfront mortgage insurance can be paid at closing or can be rolled into the mortgage. The annual mortgage insurance is for the life of the loan unless your down payment is 10% or higher.

What credit score requirements are there?

You must have a minimum credit score of 580 to qualify for a low down payment; however, your score can go as low as 500, but if it falls between 500-579, you’ll have to make a larger down payment.

Note: Know that lenders look at each of your credit scores and use the middle score to determine whether or not to lend to you. Each of your credit reports (TransUnion, Experian, and Equifax) has an individually generated FICO score. No matter how high or low your credit scores are, lenders use the score that is in the middle (not the average). So if you have the following credit scores— 560, 580, and 650— your lender would use your 580 credit score when determining your interest rate.

What down payment requirements are there?

FHA loans require a 3.5% down payment for scores above 580. For a $150,000 house, the minimum you would have to pay is $5,250 (plus closing costs) if your score is 580 or above.

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