FHA Loans - Requirements and How They Work

09.15.2020 | Category: Homebuying

Updated 10.20.2023

The FHA loan is a loan sponsored by the U.S. Department of Housing and Urban Development (HUD), are government backed home loan backed by private lenders such as Mutual of Omaha Mortgage. FHA loans are a great option for first-time home buyers who may struggle to meet steeper loan requirements, offering easier credit qualifications and smaller downpayments. 

How FHA Works

While classified as a government loan, the FHA is not a loan that you apply through the government to receive. Rather, you can apply for an FHA loan through private lenders such as Mutual of Omaha Mortgage while rest assured that the Federal Housing Administration with the Department of Housing and Urban Development (HUD) offers an insurance guarantee. This insurance guarantee allows lenders to then offer prospective borrowers the opportunity to lend with easier qualification and protects them from potential customer defaults. This makes an FHA a great option for first-time homebuyers who have less than perfect credit or don’t have a large sum of money on hand for a downpayment. 

FHA Loan Requirements

While easier to qualify for, FHA loans still have a list of requirements a borrower must meet to ensure they are fit to lend. These requirements include: 

  • Consistent and stable income that will allow you to meet your monthly mortgage payments
  • A minimum down payment of 3.5% on your new home 
  • A credit score of at least 620 
  • Your new home must be your primary residence- it cannot be your second home or investment property
  • The property must be apprised by a licensed appraiser and meet minimum FHA requirements 

One of the most appealing aspects of an FHA loan in comparison to other loan types is the lower credit score requirement. If you’ve had credit issues in the past but you are ready to purchase your first home, an FHA loan is a great option that can bring your dreams of homeownership to a reality.

FHA Mortgage Down Payment

One of the most daunting aspects of buying your first home can be the downpayment—how much it should be and how much you can afford. On most conventional loan products, the required downpayment is around 10-20% which typically falls outside of most first-time homebuyers’ budgets. An FHA loan, requiring a minimum of 3.5% down may help bring homeownership within reach. 

Another benefit to the FHA program is it allows for gift funds—or money from an outside party, typically family or friends—to be contributed towards the homeowner’s down payments and closing costs. This, in turn, allows the borrower to spend less out of pocket and more towards their first mortgage payment or closing fees. 

FHA Mortgage Insurance

FHA loans are a great option for borrowers with lower credit and a limited amount of cash to put down upon purchasing their house. However, it is important to know that with these easier downpayment requirements, you may be required to pay mortgage insurance on top of your monthly mortgage payments as a result of these easier qualifications. 

Private mortgage insurance (or PMI) is an insurance that prevents borrowers from defaulting on their loan, working as a sort of safety net for lenders. PMI is required when a borrower puts less than 20% down on their home; however, it is required on all FHA loans regardless of amount put down for the borrower to pay two mortgage insurance premiums: 

  • Upfront mortgage insurance premium: 1.75% of the loan amount, paid once the borrower has been accepted for a loan. This premium can be rolled into the financed loan amount. 
  • Annual mortgage insurance premium: 0.45% to 1.05% depending on the loan term (15 or 30 years), loan amount, and the initial loan-to-value ratio (LTV) 

Unlike private mortgage insurance, which can be removed from your loan, the insurance premiums cannot be removed from your FHA loan. The only way to remove these insurance premiums is to refinance your home into a new mortgage. 

How FHA Mortgage Loan Limits Work

Every year the Federal Housing Authority (FHA) sets a maximum on mortgage limits, varying by state, county, and number of units. To view the FHA loan limit in your area, visit the HUD website. As of 2023, the average loan limit on a single-family home sit around $472,030 to a ceiling of $1,089,300. The limit can also vary in high-populated urban and metropolitan areas, so it is important to know the loan limit in your area before applying for an FHA loan. 

Feel free to reach out to one of our Mutual of Omaha Mortgage loan officers if you have any further questions regarding the loan limit in your area. 

Is an FHA Loan Perfect for You?

One of the biggest draws to the FHA loan program is its lower credit requirements, aiding borrowers with less than idea credit achieve their perfect loan. Not only is this loan easier to qualify for, but with Mutual of Omaha Mortgage’s mortgage experts, we’ll be by your side every step of the way. 

If you have less than perfect credit, or have had a credit mishap in the past, we would love to help you explore your homeownership options and work to find a financing solution for your unique situation. 

Give us a call at 1-800-24-RATES (1-800-247-2837) and we would be happy to go over your options together! 

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