The requirements for an FHA loan differ for individual loan types but do require as little as a 3.5% down payment on a home purchase loan. FHA loans can be a good choice for people buying their first house, people with a lower credit score, or those with a challenging credit history.
Federal Housing Administration (FHA) loans are in a category of mortgages called government-insured mortgage loans, also known as government-backed mortgage loans. FHA home loans were created to help people, especially first-time buyers and seniors, become homeowners.
Not everyone has a perfect credit score, that's why government-insured loans can be fitting for those individuals who may have less-than-desirable credit scores. A conventional loan typically requires a credit score above 620. But FHA and VA loans are available for homebuyers with credit scores of at least 580.
Some types of government backed loans that are available include, VA loans, USDA loans, and FHA loans. VA loans are available for veterans and military personnel. USDA loans are designed for rural homebuyers. FHA loans are backed by the Federal Housing Administration.
Mortgages purchased and guaranteed by Fannie Mae are called conforming loans. 14 Conforming loans often have lower interest rates than non-conforming or jumbo loans, not backed by Fannie Mae.
Fannie Mae purchases mortgages from lending institutions in an effort to increase affordable lending activity at those institutions. Fannie Mae is not a federal agency. It is a government-sponsored enterprise under the conservatorship of the Federal Housing Finance Agency (FHFA).
The interest rate is fixed and is often lower than private loans—and much lower than some credit card interest rates. View the current interest rates on federal student loans. The interest rate is fixed and may be lower than private loans—and much lower than some credit card interest rates.
An FHA loan is a type of mortgage geared toward borrowers with lower credit scores or who otherwise don't qualify for a conventional loan. You can use an FHA loan to buy, build or renovate a home, or to refinance an existing mortgage.
Types of government-backed mortgages
There are three main types of government-backed mortgage programs: VA, USDA, and FHA. Each type of mortgage has its own requirements regarding what down payment, credit score, and debt-to-income ratio (DTI) you'll need to qualify.
The three primary factors that can disqualify you from getting an FHA loan are a high debt-to-income ratio, poor credit, or lack of funds to cover the required down payment, monthly mortgage payments or closing costs.
Loans are not taxable, so you don't report the loan on your tax return. You may claim an education tax credit if you use loan proceeds to pay school-related expenses (like tuition and fees) but not living expenses (like room and board).
FHA Loan: Cons
Here are some FHA home loan disadvantages: An extra cost – an upfront mortgage insurance premium (MIP) of 2.25% of the loan's value. The MIP must either be paid in cash when you get the loan or rolled into the life of the loan. Home price qualifying maximums are set by FHA.
The Federal Housing Administration (FHA) - which is part of HUD - insures the loan, so your lender can offer you a better deal.
Government-Backed Mortgages Overview
Government loans like FHA, VA, and USDA make buying homes easier.
An FHA loan may be a better option if you have a lower credit score, a higher DTI ratio, or less money saved for a down payment. On the other hand, a conventional loan may work better if your finances are sound and you can qualify for favorable loan terms.
Because they are insured, banks are more willing to lend money to homebuyers with relatively low credit scores and little cash to put down on the purchase. First-time homebuyers may find that an FHA loan is their most affordable mortgage option.
Credit score requirements
Most first-time home buyer programs require a minimum credit score, often around 620, to qualify for conventional loans. However, some programs, like FHA loans, are more lenient, allowing scores as low as 580 or even lower with higher down payments.
It helps homebuyers by insuring their loans so lenders can offer lower down payments and closing costs. FHA loans offer assistance to first-time homebuyers, seniors who partially or fully own their home, and those buying a manufactured or mobile home.
Government-backed loans like FHA, VA, and USDA loans, often touted easier to get, actually have higher denial rates than conventional loans. Government loans do offer lower down payment and credit score criteria.
Fannie /Freddie loans require a minimum FICO credit score of 620 to qualify, but the approval process for applicants with credit scores between 620 and 660 may take longer than higher scores. A 20% down payment is not the only option! You can put down as little as 3%.
Sallie Mae is not a federal loan servicer.
When Sallie Mae first formed, it was a government-sponsored enterprise servicing federal student loans — or loans made by the government. But in 2014, it split into two separate companies.
FHA stands for the Federal Housing Administration. GSE stands for Government-Sponsored Enterprise. By default, FHA home loans fall into the category of GSE loans. These home mortgages are constructed to help lower-credit home buyers and those with low income the ability to purchase a home.