What is an 'FHA Loan'

An FHA loan is a mortgage issued by federally qualified lenders and insured by the Federal Housing Administration (FHA). FHA loans are designed for low-to-moderate income borrowers who are unable to make a large down payment. As of 2016, these loans allow the borrower to borrow up to 96.5% of the value of the home; the 3.5% down payment requirement can come from a gift or a grant, which makes FHA loans popular with first-time homebuyers.

BREAKING DOWN 'FHA Loan'

FHA loans were created after the Great Depression in the 1930s. During this time, defaults and foreclosures skyrocketed. In response, the government created federally insured loans that gave mortgage lenders peace of mind, reduced lender risk and stimulated the housing market. FHA loans are offered to low-income individuals who have credit scores as low as 500. Individuals with a credit score between 500-579 can obtain an FHA loan with a down payment of 10%; individuals with a credit score higher than 580 can get an FHA loan with as little as 3.5% down.

Even people who have no credit or have gone through bankruptcy and foreclosure may still qualify. However, the lower the credit score and the lower the down payment, the higher the interest rate. In addition to these traditional first mortgages, the FHA offers a reverse mortgage program known as a Home Equity Conversion Mortgage (HECM). This program helps seniors convert the equity in their homes to cash while retaining the titles to their homes.

Additional FHA Loan Requirements

While FHA loans give mortgage opportunities to people with low income, low credit and who may be be first-time homebuyers, there are specific lending requirements outlined by the Federal Housing Authority. First, all borrowers must have a steady history of employment.

This is important because the FHA also requires a borrower's front-end ratio, which is the summation of the monthly mortgage payment, HOA fees, property taxes, mortgage insurance and homeowners insurance, be less than 31% of total gross income. However, it is possible to be approved with a 40% ratio. Additionally, a borrower's back-end ratio, which is the summation of the monthly mortgage payment and and all other monthly consumer debts, is required to be less than 43% of total gross income. However, it is possible to be approved with a ratio as high as 50%.

Further, borrowers must be at least two years out of bankruptcy, unless a borrower who has recently gone through bankruptcy has demonstrated it was an uncontrollable circumstance. Borrowers must also be at least three years removed from any foreclosures and demonstrate they are working toward re-establishing good credit.

RELATED TERMS
  1. Federal Housing Administration ...

    A United States government agency that provides mortgage insurance ...
  2. Home Equity Conversion Mortgage ...

    A type of Federal Housing Administration (FHA) insured reverse ...
  3. FHA Streamline Refinance

    A mortgage-refinancing option offered by the Federal Housing ...
  4. Up-Front Mortgage Insurance - UFMI

    An insurance premium that is collected, typically on Federal ...
  5. Qualified Mortgage Insurance Premium

    Premium paid by homeowners on mortgage insurance for FHA loans ...
  6. Front-End Ratio

    A ratio that indicates what portion of an individual's income ...
Related Articles
  1. Retirement

    Understanding FHA Home Loans

    Don't be overwhelmed when filling out these forms. Find out what you need to do here.
  2. Personal Finance

    Top Reasons To Apply For An FHA Loan

    When is it a good idea to apply for a Federal Housing Administration loan?
  3. Investing

    Is An FHA Mortgage Still A Bargain?

    Borrowers initially flocked to FHA loans due to their low down payments and accessibility for people with low credit scores.
  4. Personal Finance

    Purchasing a Home with Bad Credit Is Possible: Here's How

    A bad credit report can become an obstacle, resulting in denials for credit or higher interest rates, but borrowers with low credit scores can still purchase a home.
  5. Personal Finance

    Is An FHA Mortgage Still A Bargain?

    If you're putting down less than 20%, the FHA's mortgage insurance premium could cost you more than private mortgage insurance with a commercial lender.
  6. Personal Finance

    Where To Get A Mortgage If You Have Bad Credit

    Here's where to go if you have a low credit score and still want a mortgage.
  7. Personal Finance

    Insuring Federal Housing Authority Mortgages

    This insurance has an edge over private mortgage insurance. Find out why.
  8. Investing

    Getting Help With Your Down Payment

    It's not as easy as it once was to save for a down payment, but these tips can help give you a head start.
  9. Managing Wealth

    Finding And Investing In FHA Condos

    Interested in a buying an FHA-approved condo? Read this first.
  10. Personal Finance

    Guidelines for FHA Reverse Mortgages

    FHA guidelines protect borrowers from major mistakes, prevent lenders from taking advantage of borrowers and encourage lenders to offer reverse mortgages.
RELATED FAQS
  1. Do banks offer FHA loans?

    Learn how banks approved by the U.S. Federal Housing Administration offer FHA loans with lower down payment requirements ... Read Answer >>
  2. Does an FHA loan require a down payment?

    Learn about Federal Housing Administration (FHA) loans, which have down payments as low as 3.5%, low closing costs and lower ... Read Answer >>
  3. Do FHA loans have closing costs?

    Learn about Federal Housing Administration loans and how financial institutions that issue FHA mortgages charge borrower ... Read Answer >>
  4. Can FHA loans be used for investment property?

    Learn the unique situations in which a home buyer can take advantage of the FHA home loan program to finance an investment ... Read Answer >>
  5. What is an FHA Streamline Loan?

    Refinance your high-interest-rate mortgage with an FHA streamline. The process is quick and easy and can work for most existing ... Read Answer >>
  6. How many FHA loans can I have?

    Discover how many FHA-insured loans an individual may have, and learn about some of the exceptions, such as relocation and ... Read Answer >>
Hot Definitions
  1. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
  2. Portable Alpha

    A strategy in which portfolio managers separate alpha from beta by investing in securities that differ from the market index ...
  3. Run Rate

    1. How the financial performance of a company would look if you were to extrapolate current results out over a certain period ...
  4. Hard Fork

    A hard fork (or sometimes hardfork) is a radical change to the protocol that makes previously invalid blocks/transactions ...
  5. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  6. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
Trading Center