What is an FHA loan?
A Federal Housing Administration (FHA) loan is a mortgage loan that’s insured or guaranteed by the federal government, through the FHA. This loan option has been around since 1934 and has helped make the Federal Housing Administration the largest insurer of mortgages in the world. FHA loans are most widely known as a great option for first-time home buyers because the requirements aren't as strict for this type of loan as they are for a conventional loan. But this loan is also a great option for seniors, people who are buying a mobile home or manufactured housing, and people who want to wrap energy improvement costs up into their mortgage.
Advantages of an FHA loan
- Requires a smaller downpayment--sometimes as little as 3.5 percent.
- Other requirements, like credit score and debt to income ratios, are usually more flexible than they are for a conventional loan.
- It's typically easier to refinance a traditional loan
- There are no pre-payment penalties
- You can borrow cash to make repairs with a 203 (k) version of this loan
- The FHA offers temporary forbearance periods or loan modifications to help if you suffer a serious financial hardship
Disadvantages of an FHA loan
- You'll pay mortgage insurance both upfront and on an annual basis
- There's a limit on the amount of money you can borrow, which may fall short of average home prices depending on where you live
- You can only use this type of loan with an FHA-approved lender
Is it right for you?
FHA loans are a good option for people who:
- don't have 20 percent for a down payment
- have a credit score of 580 or above