What is a FHA Home Loan? How Does This Type of Mortgage Work?


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You might think that you need to have enough money saved for a 20% down payment before you can even begin looking for a home.  We’re here to tell you that’s a myth.

There are mortgage programs designed to help lower the total amount of closing costs and make home buying more attainable – even if you’re still building your credit.

You may have heard of an FHA loan or a 203k loan, but what is a FHA home loan? Let’s break it down.

What is a FHA Home Loan?

An FHA home loan is a mortgage insured by the Federal Housing Administration and can be secured with as little as 3.5% down.

This is a great program for first time home buyers because of the lower down payment minimum. Borrowers also can qualify for a 3.5% down payment if they have:

  • Lower credit scores, and
  • Higher than traditional debt to income ratios (which is great when you start out with student debt or other loans.)

How Does a FHA Home Loan Work?

Now that we’ve covered what is a FHA home loan, let’s talk about how it works.

A FHA home loan requires the borrower to have monthly mortgage insurance as well as a Mortgage Insurance Premium (or MIP as it’s often called).

Mortgage Insurance is designed to reduce the risk of loss to a mortgage lender if a borrower defaults on their mortgage payment. MIP can be paid upfront or financed into the mortgage.

A lower down payment through an FHA Mortgage can mean that you set money aside for other things such as home improvement projects or even moving costs.

Mortgage Insurance on an FHA loan is currently permanent, but after you’ve built up enough equity, you may be able to refinance out of an FHA loan.

Always speak with an experienced mortgage loan originator so you can discuss the option that is best suited for you – and really challenge them on what is available to meet your needs, whether it is a low down payment, a maximum monthly mortgage amount for your budget, or both.