Best FHA Loans

A Federal Housing Administration loan is a government-backed mortgage that can help you purchase a home with more flexible credit requirements than a conventional loan. You don’t have to be a first-time buyer to use an FHA mortgage loan, but one can help if you lack savings for a down payment or face credit challenges.

As with any other type of mortgage, though, shop around for the best deal, because FHA mortgage loans are issued by private lenders with their own rates and fees. Here’s a closer look at FHA loans to help you decide whether one could be right for you.

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An FHA loan is a mortgage insured by the Federal Housing Administration, which allows your lender to offer you a better deal compared with a conventional loan. Government backing means easier credit qualifying and lower down payments because lenders are protected if you default on payments.

Buyers can obtain FHA home loans through approved lenders, such as banks. The loans have 15- or 30-year terms with fixed or adjustable interest rates.

Flexible underwriting standards are geared toward homebuyers with credit blemishes or little savings toward a down payment. You could qualify for an FHA loan if you’ve had a bankruptcy or other financial difficulties, but you will need to satisfy certain requirements regardless of your circumstances.

When considering an FHA mortgage loan, be sure to understand the different options that are available:

Borrowers are limited to one FHA loan at a time, except in certain circumstances, such as relocation or divorce.

Government backing can make owning a home possible for people who might otherwise have been denied loans. Although FHA loans feature relaxed credit requirements, you still must present the best payment history you can.

Bankruptcy does not rule out an FHA home loan, but you will have to wait two years to apply. A foreclosure requires a three-year waiting period.

Also, note that borrowers cannot get an FHA loan without a down payment. But you can use gift funds to cover your down payment, and the seller can pay some of your closing costs: up to 6% of the home’s purchase price.

Chief among the drawbacks of an FHA loan for bad credit is mortgage insurance. To protect the lender against losses that may result if you default on your mortgage, an FHA loan requires both upfront and annual mortgage insurance for all borrowers, regardless of the amount of down payment.

The upfront mortgage insurance premium is 1.75% of the loan amount and can be paid at closing or rolled into the loan. The annual premium is typically added to your monthly mortgage payment, and can range from 0.45% to 1.05% of the loan amount per year.

If you put at least 10% down, you will pay this premium for 11 years – but if you put less than 10% down, you will pay the entire term length. Getting rid of FHA mortgage insurance requires refinancing into a non-FHA loan.

“If a borrower has good credit but limited cash on hand, other government-backed loans are available for less money down,” says Stephen Moye, sales manager and senior loan officer for Tustin, California, mortgage lender New American Funding.

You can seek preapproval for an FHA loan, but you will need to work with an FHA-approved lender. The process will resemble the one for other types of mortgages.

Borrowers will need to provide documents to verify income and employment, such as W-2 forms and pay stubs, as well as bank and retirement account statements, and other records.

How long does FHA preapproval take?

If you are preapproved, you will receive a letter that is valid for 60 to 90 days. The letter typically includes the purchase price, loan program, interest rate, loan amount, down payment amount and property address.