Unlike conventional loans, FHA loans are insured by the government, specifically the Federal Housing Administration, and can be issued by any FHA approved lender in the U.S. This protects lenders from defaulted loans, makes it possible for them to offer prospective borrowers more competitively affordable interest rates on loans that may have been considered more risky before FHA loans were established. It also allows for low closing costs, smaller down payment requirements, and more relaxed credit qualifying guidelines.
FHA loans require at least a 3.5% down payment. In some cases, borrowers may use gift funds for 100% of their down payment amount, essentially allowing them to borrow the entire loan amount with no money down. Monthly mortgage insurance is required for FHA loans, regardless of equity, as well as an upfront mortgage insurance premium in the amount of 1.75% of the loan amount. Another benefit to FHA loans is that they are assumable. This means that the loan can be passed from one borrower to another, in a situation where a borrower is selling their home to a new borrower. This would be beneficial in a case where the sellers have a lower rate than what current market conditions have to offer to the buyer. It’s also an incentive for the seller to offer prospective buyers, to make their home more attractive and potentially easier to sell. Borrowers with credit scores of 580 and above are eligible for maximum financing (3.5% down). But FHA guidelines allow borrowers with credit scores as low as 500 to qualify, though they will require a down payment of at least 10%. FHA provides guidelines, but individual banks and lenders may (and will likely) have higher minimum credit score requirements. Though FHA loans can be used to finance 1-4 unit residential properties, condos and manufactured homes, it is typically used by borrowers who intend to occupy their properties.
The FHA has a variety of loan programs to offer borrowers, including reverse mortgages for senior citizens (HECM), purchase and refinance loans, including both rate/term and cash out. For those with existing FHA loans, a quick and easy refinance option is available, called a streamline refinance. FHA streamlines offer a ton of flexibility, including looser credit scoring requirements, easier income verification and much more limited paperwork. In most cases, an appraisal is not even required. Additionally, FHA loans can be either adjustable-rate or fixed-rate mortgages.