We often get asked “what is an FHA loan?” and “how does and FHA loan work?”. Well, if you’re looking for a home and need a loan with easier credit requirements and a low down payment, a Federal Housing Administration (FHA) loan might be right for you.
An FHA mortgage is a home loan that’s backed by the government and insured by the Federal Housing Administration. While FHA loans require monthly mortgage insurance premiums, the lending requirements tend to be a little more flexible than a conventional loan — and the qualification process is typically a little easier too.
You can purchase a home for your primary residence with a down payment as low as 3.5%. The minimum FHA loan credit score is 580. If your credit score is lower than 580, you may still be eligible for financing if the percentage of your home loan is 90% or less, when compared to the value of the property. This ratio is called the loan-to-value, or LTV. In this case, you’d need a down payment of at least 10% of the purchase price.
First Internet Bank offers both 30- and 15-year fixed-rate FHA mortgage options for purchasing your home as well as refinancing options, with a credit score of 620 and above.
Contrary to popular belief, FHA mortgages are not just for first-time home buyers. But there are some other requirements to keep in mind:
- You must be able to prove U.S. residency and have a valid Social Security number
- The home you purchase with an FHA loan must be your primary residence
- You must have a steady employment history and/or been at the same job for the last two years
FHA homes must be single-family units, but this is not just limited to houses. Condos, townhomes and duplexes may also be eligible.
Even if you’ve had a recent bankruptcy or foreclosure, you may still be eligible for an FHA loan in certain situations. FHA loans are also subject to loan amount limits that depend on your geographic area. Visit the Mortgage Limits page on the HUD.gov site.
The process for an FHA loan can be broken up into five stages:
- Find out if you’re eligible for an FHA loan by contacting a HUD-approved mortgage lender like First Internet Bank (HUD is the U.S. Department of Housing and Urban Development)
- Submit your FHA home loan application with your lender (friendly reminder: First Internet Bank offers FHA loans!)
- Your lender will schedule a property appraisal and inspection to determine the value of the home (more details below)
- To determine if you qualify for the desired loan amount, your employment, income, credit score and debt-to-income ratio will be evaluated
- The big day — closing! Sign the final contract, pay any fees, receive the keys and move into your new home
Appraisal and inspections
A HUD-approved appraiser must confirm that the property meets all national and/or state building codes. The appraiser will record information about the home on a Residential Appraisal Report:
- Number of rooms
- Year constructed
- Condition rating of each area of the house and all mechanical systems
The condition rating system uses a scale of 1-6 to identify properties that may need significant repairs. These evaluations determine the livability of the property, any health or safety concerns, and soundness and structural integrity. FHA homes are also inspected for hazardous conditions such as radioactive materials, toxic chemicals and erosion.
Although the FHA appraisal and inspection processes are more stringent, it can save you financial heartache later on by saving you from repairs that would hurt an already tight budget.
Understanding the requirements and limitations upfront will make you better prepared to get the financing for your home. If you think an FHA loan might be a good option for you, contact one of our experienced loan specialists at 1-866-742-5158 with any questions you might have.
When you are ready to apply, you can start the process with our easy online application.