Buy a Home

FHA Loan

Flexible options, smaller down payment and more

If you’re preparing to buy your first home or if you’re thinking about moving to a different home, you may be concerned about meeting the requirements for financing your purchase. An FHA loan provides simple and flexible options.

Approvals are more attainable because of lower credit score requirements and smaller minimum down payments, yet FHA loans offer competitive interest rates.

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FHA LOAN BENEFITS

Popular for first-time homebuyers
Flexible credit require-
ments
Down payment as low
as 3.5%
Gift down payments allowed
Term length options
Fixed or adjustable interest rate
No pre-payment penalty

What Is an FHA Mortgage Loan?

It might be surprising to learn that there are many loan options available for buying a home. Mortgage loans often differ depending on the requirements to qualify and the terms and conditions of each loan type, including the loan’s length, the interest rate and the minimum down payment.

An FHA mortgage loan is backed by the federal government through the Federal Housing Administration. The government insures lenders approved by the FHA to cover risks from borrowers who cannot pay back these loans.

Part of the equation for government support of these loans is that every FHA mortgage holder pays a mortgage insurance premium (MIP) to help protect lenders from the possibility of losses from unpaid loans.

Therefore, FHA loans have more flexible requirements than conventional mortgage loans, including greater latitude regarding an applicant’s overall credit rating. Another advantage is a lower required down payment, starting at just 3.5% of the home’s value.

These features make FHA loans a popular alternative, especially among first-time homebuyers. Compare an FHA loan with two other government-backed home loan programs below:

Feature	FHA Loan	USDA Loan	VA Loan
Down Payment	Minimum: 3.5%	None required	As little as 0%
PMI	Mandatory FHA term: MIP* instead of PMI*	Not required However, there is an up-front, one-time 1% guarantee fee and an annual fee of 0.35% of the loan balance.	Not required However, there is an up-front, one-time "VA Funding Fee" charged by the Department of Veterans Affairs to help keep the VA loan program self-sustaining.
Credit Score	Minimum: 580	Minimum: 580	Flexible
DTI	Flexible	At or below 50%	At or below 50%
Distinctions	Approval more within reach because of lower score, lower down payment requirements	Provides affordable homeownership in rural, small town communities	Makes owning a home feasible for active members, veterans and surviving spouses of U.S. armed forces

How to Qualify for an FHA Loan

To learn whether an FHA loan is your best option for purchasing a home, connect with us. To get you started, we’ve outlined the steps and documentation needed to help you understand the process.

First Steps toward Obtaining Your FHA Loan

Homebuyers often start by requesting a quote for their interest rate or beginning an application with us at Compass Mortgage. By sharing basic information about your finances, we’ll work with you to get a copy of your credit report, and we’ll help determine the value of the home you’re interested in purchasing.

In addition to arranging for an appraisal conducted by a licensed professional, we will schedule an inspection of the home to make certain it meets the minimum property standards which the FHA requires for properties it guarantees.

We’ll also discuss the terms and conditions for which you qualify and your options, and we’ll request various documents needed for underwriting your loan to make certain it begins on a solid foundation.

We’re with you through every step, all the way to closing when, together, we will finalize your purchase.

FHA Loan Requirements

These are some of the common requirements to qualify for an FHA purchase loan. If you have any questions, we’re here to help!

Credit score requirements vary. In most cases a credit score of 580 or higher qualifies. This may shift lower or higher based on other factors such as Debt-to-Income ratio (DTI) and down payment amount. (DTI shows how much of your monthly income goes to paying for your debt.)
Through underwriting evaluation, you’ll need documentation of consistent income with DTI at or below 50%.
Any foreclosure within the previous three years will disqualify an applicant.
Along with income information you need to share employment verification and history.
A down payment of 3.5% or more of the home’s value. This minimum requirement can go up, depending on your credit score and finances. Gift down payments are allowed.
The home needs to be your primary residence, and it must meet FHA’s minimum property standards, established by a professionally-performed inspection.
You are required to move into the house within 60 days of closing your new loan.

FHA Loan FAQs

Buying a home is an important investment, and borrowing the money to make the purchase is an important decision. It’s OK to have questions! We’ve compiled answers to the frequently asked ones, but don’t hesitate to ask more.

What is the difference between an FHA loan and a conventional loan?

Both FHA and conventional loans offer flexible financing options. FHA loans differ in that they’re insured by the government, so lenders don’t need you to meet some of the parameters of a conventional loan.

If you have a lower credit score, an FHA loan may be the most affordable option for you. It may provide fewer options than a conventional loan, but it offers competitive interest rates and the possibility of a lower down payment.

A conventional loan, on the other hand, often has more restrictive requirements based on standard borrower criteria. The benefit, if you qualify, is that you also get better options when it comes to your mortgage insurance, term lengths and closing costs, as well as a lower interest rate.

How much do I need for a down payment?

You’ll want to consider how much you’ve been able to save for a down payment and the value of the house you want to buy, as well as how the down payment amount impacts the mortgage for which you are applying.

With an FHA loan, you’re also able to use a gift toward your down payment amount, as long as it’s well documented as a gift and clearly not a loan.

A typical minimum required down payment amount for FHA loans is 3.5% for applicants whose credit score is 580 or more. With a higher down payment at 10%, you may qualify with a lower credit score, down to 500. Depending on your current finances and your plans for home ownership, lenders will consider several factors to determine your minimum down payment.

What are "minimum property standards?"

In order to ensure that every home being financed with an FHA mortgage loan is a good investment for all involved, the FHA has established standards applicable to all homes for which it provides financing.

These minimum property standards assess a home’s safety, security, soundness (or solidity) and structural integrity to evaluate if the house itself or the property surrounding it could negatively affect the health, safety or security of its residents.

The basis of this assessment is a required home inspection which a licensed professional will expedite. The inspector will consider factors such as the condition of the home’s electrical wiring, plumbing, roof and HVAC (heating and cooling systems). The home’s cosmetic features are not part of the inspection.

What is mortgage insurance?

Mortgage insurance is a fee which a borrower pays to protect the lender if the borrower cannot repay a mortgage loan (or stops making monthly payments).

To offer flexible qualification requirements, FHA mortgage loans require a mortgage insurance premium (MIP). Homebuyers using an FHA loan will pay an upfront MIP that is included at closings, as well as an annual MIP that will become part of the monthly mortgage payment. The annual MIP decreases every year over the lifetime of the loan.

The MIP can be reduced based on various considerations, such as a higher down payment or a shorter term length.

For example, if your down payment is less than 10%, the MIP on your new FHA loan lasts for the life of the loan, reducing slightly each year. If your down payment is 10% or more, the annual MIP will only last 11 years.

A typical upfront MIP is around 1.75% of your loan amount. The annual MIP can range between 0.45 and 1.05% of your loan amount.

What closing costs will I need to pay?

When you close your FHA loan to purchase a home, you’ll need to account for several costs, both those which are paid up front and those included in your ongoing monthly payment. These will be clearly outlined as your loan is processed and before you close.

Beyond your initial down payment, you’ll also pay closing costs which cover expenses such as loan origination fees, an appraisal, upfront MIP, title insurance and so on. These costs range from 1-3% of your total loan amount.

The FHA also allows that up to 6% of these costs can be covered by the person selling you the home. This may be an option if it helps everyone close the sale.