How to buy a house with an FHA loan

If you’re thinking about buying a house with an FHA loan, make sure you know what they’re all about. 

FHA loans offer numerous benefits to borrowers who need more flexible lending options, which makes them great for first-time buyers or those with lower credit scores.

What's in this article?

What is an FHA loan?
How do FHA loans work?
Types of FHA loans
FHA loan requirements
How to apply for an FHA loan
Apply for an FHA loan today with Compass Mortgage

These government-backed loans allow lenders to offer more flexible requirements in exchange for protecting them against borrowers who default.

Read on to learn how FHA loans work, their requirements, and how to apply with a trusted lender.

What is an FHA loan?

FHA loans are insured by the Federal Housing Administration and issued by FHA-approved lenders.

This government backing means that the FHA will protect lenders if a borrower defaults on their loan.

As a result of this protection, lenders can offer lower down payment options, lower credit score requirements, and the opportunity to qualify even with a history of financial issues.

FHA loans are most popular with first-time homebuyers or low-income households, but you don’t need to fit into either of these categories to apply or qualify. 

For many, it’s just the most flexible, affordable lending option that fits into a variety of lifestyles and goals.

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How do FHA loans work?

Congress created the FHA during the Great Depression to make it easier for borrowers to qualify for a loan.

Borrowers can get an FHA loan from an approved lender, which can set their own rates and underwriting standards as long as FHA minimum requirements are met.

These requirements include down payment amounts, credit score, income and employment history, and debt-to-income (DTI) ratio.

Borrowers also must pay upfront and annual mortgage insurance premiums, which many borrowers pay even if they get a conventional loan.

Types of FHA loans

There are several types of FHA loans, but not all lenders offer each type. 

The most common types of FHA loans include the following.

Traditional purchase FHA loans

A traditional FHA purchase loan provides funds for a primary residence.

Borrowers can get a fixed-rate mortgage for 15-year or 30-year terms, or an adjustable-rate mortgage that begins with a low-interest rate and gradually adjusts over time.

Rate-and-term refinance

Borrowers can refinance to an FHA loan from another loan type with an FHA rate-and-term refinance.

They can also refinance their current FHA loan to get a better rate and terms.

Cash-out refinance

An FHA cash-out refinance allows homeowners to tap into their home equity by replacing their current mortgage with a new, larger FHA loan.

The difference between the new loan amount and what you owe on your old mortgage will be provided to you in cash to use in whatever ways you choose.  

Funds can be used for anything including home improvements, debt payments, or other large expenses.

FHA streamline refinance

A streamlined refinance allows those with an existing FHA loan to refinance easily, with fewer requirements.

For example, borrowers may not need an appraisal and may need less documentation for income, employment, and assets.

You can only use a streamline to get a new rate or terms, though — not to cash out.

Other FHA loans

Some less-common FHA loan types that some lenders may offer include:

  • FHA 203(k) loan for borrowers to purchase a fixer-upper and make renovations
  • FHA Section 245(a) Graduated Payment Mortgage with a low initial payment that gradually increases over time

FHA loan requirements

FHA loans have certain requirements borrowers must meet, and these can vary slightly from lender to lender.

Generally, the home you want to buy must be appraised by an FHA-approved appraiser and meet certain U.S. Department of Housing and Urban Development property guidelines.

The home also must be your primary residence, and not an investment property or second home.

It also must meet certain income, down payment, and credit score requirements, which we’ll outline below. 

Income and employment

To qualify for an FHA loan, you’ll have to provide verification of your employment history and income through pay stubs, federal tax returns, and bank statements.

Prepare to provide proof for at least the past two years.

Credit score and down payment

FHA loans are popular with buyers who may not have the ideal credit score or enough of a down payment for conventional loans. 

An FHA loan’s required down payment amount is tied to your credit score.

A FICO credit score of 580 or higher requires 3.5 percent down, while a score of 500-579 requires 10 percent down.

To compare, borrowers generally need a credit score of at least 620 to qualify for conventional loans.

FHA mortgage insurance premiums

You’ll have to pay an annual mortgage insurance premium (MIP) for the life of the loan unless you make a 10 percent down payment, which requires MIP for 11 years.

An upfront mortgage insurance payment is also required. 

DTI ratio

Lenders generally would like borrowers to have a DTI ratio of less than 43 percent, although some will allow less than 50 percent.

This means that your total monthly debt payments can’t be more than 50 percent of your income.

To calculate your DTI, divide your total monthly debt payments by your gross monthly income.

How to apply for an FHA loan

Prior to applying for an FHA loan, make sure you meet the FHA requirements for getting a loan.

Check your credit score, save for an adequate down payment, and ensure you have additional savings for closing costs.

You also should calculate your DTI, and work to pay down any debts prior to applying for a loan.

Then, you can find an FHA-approved lender and begin applying. 

Have all required documentation ready to go, including your Social Security number, proof of citizenship, and proof of income.

Ask your lender upfront what types of documentation they will need, so you can gather these documents ahead of time.

Apply for an FHA loan today with Compass Mortgage

Ready to get started with an FHA mortgage? 

The expert loan officers at Compass Mortgage are ready to help.

When you apply for FHA loans with Compass, you can expect nothing less than our absolute best. 

We go above and beyond in everything we do and are driven by a calling to treat every person we meet with love and respect.

If you’re ready for an unmatched mortgage experience, apply today with the Compass team. 

We can’t wait to help you get into your perfect home!