How Does an FHA Home Loan Work?

You can get an FHA loan from most US financial institutions that have mortgage operations, including our top mortgage lenders, as well as other mortgage lenders. They are guaranteed by the FHA through mortgage insurance that the borrower is required to purchase.

Since FHA loans are designed to help ordinary Americans buy homes, the amount of money that can be borrowed is limited. In most areas of the United States, the FHA loan limit for a single-family home or condominium is $ 331,760 in 2020. This can reach $ 765,600 in some high-cost real estate markets and is even higher in Alaska and Hawaii. There are also higher limits for multi-unit properties.

Buyers can use FHA loans to purchase properties with one to four units. There is an owner occupancy condition which means the buyer must live in the property. FHA loans cannot be used to purchase a vacation home.

An FHA loan can also cover the cost of a single unit of a condo or townhouse. Approval in these cases depends on whether or not the condo or townhouse has a particularly restrictive HOA.

What Are the Different Types of FHA Loans?

There are several types of FHA loans, but the two most common are FHA 203 (b) and 203 (k) loans. Here is the difference.

FHA 203 (b) loans (standard FHA mortgage loan)

If you are just planning to buy a house in good condition and want to move in immediately, an FHA 203 (b) loan is what you need. The 203 (b) loan is the “standard” FHA loan used to purchase a home.

FHA 203 (k) loans (FHA rehabilitation loan)

FHA 203 (k) loans are designed to help buyers purchase homes in need of major repairs or renovations. In other words, a 203 (k) loan, also known as an FHA rehabilitation loan, allows a buyer to purchase a home. and finance the cost of repairs in one easy-to-obtain loan.

When it comes to credit and down payment standards, FHA 203 (k) loans are essentially the same as 203 (b) loans, but lenders may charge additional fees.

FHA loan requirements

• 500 credit score – On the credit side, the FHA loan requirements require a score of at least 580 if you want to make the minimum down payment of 3.5%. However, you can get an FHA loan with a FICO® score as low as 500 if you can reduce the purchase price by 10%. The question of how to get a mortgage with bad credit is a challenge for many home buyers, and FHA loans can be the solution.
• 3.5% deposit – You will need a minimum down payment of 3.5% to qualify for an FHA loan. You can choose to put in more money if you want, but that’s the minimum. Up to 100% of your down payment can come from a down payment gift (although there are limits on who can give you money for a down payment on an FHA loan).
• Two years of continuous employment – You will generally need at least two years of continuous employment in the same field.
• Relatively low debt – Your income must be high enough to justify the new mortgage as well as any other debt payments you have. Most FHA lenders want to see a debt-to-income ratio (DTI) of 43% or less, but some may be willing to go higher. If you spend half of your income on debt repayment, you may not be eligible.

What is the difference between an FHA loan and a conventional loan?

A conventional loan is the most common type of mortgage loan used by home buyers in the United States.

The biggest difference between conventional loans and FHA loans is that while conventional loans must meet certain lending standards, they are not. guaranteed by any agency. FHA loans are guaranteed by the HUD. This is why FHA loans have much easier credit requirements. They represent a significantly lower risk for the lender because of this guarantee.

Technically, a conventional loan refers to a standard mortgage that meets Fannie Mae or Freddie Mac lending standards.

Pros and Cons of FHA Loans