FHA Loans - Requirements and How They Work

09.15.2020 | Category: Homebuying

Sponsored by the U.S. Department of Housing and Urban Development (HUD), FHA loans are government-backed home loans distributed by private lenders like Mutual of Omaha Mortgage. FHA Loans are a great financing option for first-time home buyers who may have less than perfect credit history or have smaller down payment goals.

How FHA Loans Work

While the FHA loan is a federal program, the government generally doesn’t make direct loans to applicants. Private lenders, like Mutual of Omaha Mortgage, finance the loan while the Federal Housing Administration with the Department of Housing and Urban Development (HUD) offers an insurance guarantee. This guarantee provides an incentive for private lenders to provide loans offers to prospective borrowers with better terms and protects them in the event of a customer default.

FHA Loan Requirements

In order to qualify for an FHA mortgage there are certain loan requirements that you’ll need to meet:

  • You’ll need to be able to show that you have a consistent and stable income source that will allow you to meet your monthly mortgage payments
  • You’ll need to put a minimum down payment of 3.5% on your new home
  • Due to the coronavirus pandemic, credit score requirements have tightened across the entire mortgage industry. In general, you’ll need to have a credit score of at least 620 to qualify for an FHA loan
  • The property you’re looking at must be your primary residence - it can’t be a second home or investment property
  • The property you’re looking at must be appraised by a licensed appraider and meet the minimum FHA housing requirements

One of the best features of FHA loans is that you don’t need stellar credit to qualify. If you’ve had a credit issue in the past and would like to purchase a home, an FHA loan may be a viable financing option that can help bring home ownership within your reach. Working with a loan officer early in the process can help you better understand your financing options.

How FHA Mortgage Loan Limits Work

The Federal Housing Authority (FHA) sets a maximum mortgage limit for FHA loans. The maximum varies by state and county (and number of units) and will generally be greater in more densely populated urban areas. To view the FHA loan limit in your area, visit the HUD website. In most parts of the country, applicants who qualify for the FHA Loan can purchase a home worth up to $331,760. In high cost metropolitan areas of the country the FHA loan limit may be as much as $765,600. To find out the FHA Loan Limit in your area, reach out to a Mutual of Omaha Mortgage Loan Officer or give us a call at 1-800-24-RATES.

FHA Mortgage Down Payment

Financing a home loan is more attractive for FHA loan-eligible applicants. Conventional loan products typically require a 10%-20% downpayment on a loan. FHA Loans allow qualified buyers the opportunity to purchase a home with as little as 3.5% down.

These government-backed loans also allow qualified buyers the chance to use eligible gift funds toward down payments and closing costs. This means less cash out of pocket for a home, and more in the buyers’ pocket for other closing fees or their first mortgage payment.

FHA Mortgage Insurance

The FHA’s flexible loan mortgage requirements allow borrowers who may not have perfect credit or huge cash savings the opportunity to purchase a home. But borrowers must pay FHA mortgage insurance as part of their new home purchase.

Private mortgage insurance (or PMI) is required on most loans when a borrower puts less than 20% down. All FHA loans, regardless of the down payment amount, will require the borrower to pay two mortgage insurance premiums:

  • Upfront mortgage insurance premium: 1.75% of the loan amount, paid when the borrower gets the loan. The premium can be rolled into the financed loan amount.
  • Annual mortgage insurance premium: 0.45% to 1.05%, depending on the loan term (15 years vs. 30 years), the loan amount and the initial loan-to-value ratio, or LTV.

Unlike PMI, the FHA insurance premium cannot be removed from your loan once you’ve established a certain enquiry threshold. The only way to remove the FHA insurance premium would be to refinance your home into a new mortgage.

FHA Loan Credit Requirements

A major goal of the FHA loan is to help first-time home buyers, or those with challenged credit, find an affordable mortgage product. Mutual of Omaha Mortgage will work with our FHA applicants through the entire process. We’ll help buyers find a competitive interest rate on an FHA loan.

If you’ve experienced credit trouble, or simply don’t have enough credit history to qualify for a conventional home loan, contact a Mutual of Omaha Mortgage Loan Officer to determine your FHA eligibility.

FHA Loans Can Work For You

If you’re looking to buy your first home, have less than perfect credit, or don’t have a ton of savings on hand for your down payment, then an FHA home loan might be the right fit for you. Contact a Mutual of Omaha Mortgage Loan Officer to determine your FHA eligibility or give us a call at 1-800-24-RATES.

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