A loan from the Federal Housing Administration (FHA) is a mortgage insured by the Federal Housing Administration (FHA) and issued by a lender approved by the FHA. FHA loans are designed for low- to middle-income borrowers. They require a lower minimum deposit and lower credit scores than many traditional loans.
In 2023, you can borrow up to 96.5% of the value of a home with an FHA loan. This means that you must pay a deposit of 3.5%. Your credit score has to be at least 580 to qualify. If your credit score is between 500 and 579, you can still receive an FHA loan as long as you can pay a deposit of 10%. For FHA loans, your deposit can come from savings, a financial gift from a family member or a grant for the down payment assistance.
Due to their many advantages, FHA loans are popular with first-time buyers.
Understanding loans from the Federal Housing Administration (FHA)
It is important to note that the FHA does not lend you money for a mortgage with an FHA loan. Instead, you will receive a loan from a lender approved by the FHA, such as a bank or other financial institution. However, the FHA guarantees the loan. Some people therefore call it an FHA-insured loan.
In order to ensure the FHA guarantee, borrowers who qualify for an FHA loan must also take out mortgage insurance and premium payments are made to the FHA. Your lender bears a lower risk, as the FHA pays a claim to the lender if you are in default with the loan.
While FHA loans (Federal Federal Housing Administration Loans) require lower down payments and credit scores than conventional loans, they impose other strict requirements.
Loans from the Federal Housing Administration (FHA) compared to conventional mortgages
FHA loans are available to people with a credit score of only 500. If your credit score is between 500 and 579, you may be able to secure an FHA loan if you can afford a deposit of 10%. If your credit score is 580 or higher, you can get an FHA loan with a deposit for only 3.5%. For comparison: As a rule, you need a credit score of at least 620 and a deposit between 3% and 20% to qualify for a conventional mortgage.
For FHA Loans California – or a mortgage of any kind – at least two years must have passed since the borrower experienced an insolvency event (unless you can prove that the insolvency event is due to an uncontrollable circumstance). You must be at least three years away from all mortgage enforcement events and prove that you are working towards restoring a good loan. If you are in arrears with your federal student loans or income taxes, you are not qualified.
Mortgage insurance premiums
For an FHA loan, you have to pay two types of mortgage insurance premiums (MIP) – one MIP in advance and one annual MIP (which is calculated monthly). In 2020, the MIP corresponds to 1.75% of the basic loan amount in advance.
You can either pay the MIP in advance at the time of conclusion or it can be included in the loan. For example, if you receive a housing loan for $350,000, you will pay an MEP of 1.75% x $350,000 in advance = $6,125. These payments are transferred to an escrow account set up by the US Treasury. If you are in default with your loan, these funds will be used for mortgage payments.
Annual MIP payments can be made every month, not annually. Payments range from 0.45% to 1.05% of the basic loan amount. The payment amounts also differ depending on the amount of the loan, the term of the loan and the original mortgage lending value (LTV). The typical MIP costs are usually 0.85% of the loan amount.
For example, if you have a loan of $350,000, make annual MIP payments of 0.85% x 350,000 USD = $2,975 (or $247.92 per month). These monthly premiums are paid in addition to the one-time advance payment of the MIP.
Depending on the term of the loan and the LTV, you make annual MIP payments for either 11 years or the term of the loan.
You may be able to deduct the amount you paid in rewards. However, you must list your prints instead of using the standard deduction to do so.