How It Works
FHA loans are mortgages insured by the Federal Housing Administration, a government agency within the U.S. Department of Housing and Urban Development (HUD). Because the government insures the lender against losses if the borrower defaults, FHA-approved lenders can offer more lenient qualifying guidelines, lower down payments, and competitive interest rates.
The FHA loan program was created in 1934 to stimulate the housing market during the Great Depression, and it continues to serve borrowers who might not qualify for conventional financing. FHA loans are particularly popular with first-time homebuyers because of the low 3.5% down payment requirement with a credit score of 580 or higher. Borrowers with scores between 500 and 579 may still qualify with a 10% down payment.
One important consideration with FHA loans is the mortgage insurance premium (MIP). Borrowers pay an upfront MIP of 1.75% of the loan amount at closing (which can be rolled into the loan), plus an annual MIP that ranges from 0.45% to 1.05% depending on the loan amount and term. For loans with less than 10% down, MIP lasts for the life of the loan. For loans with 10% or more down, MIP can be removed after 11 years.
Who Is This For?
- First-time homebuyers who need a low down payment
- Borrowers with lower credit scores (580+ for 3.5% down)
- Buyers who have experienced past credit events like bankruptcy or foreclosure
- Those who receive down payment gifts from family members
- Borrowers who want flexible qualifying guidelines