FHA loans are mortgage loans that are underwritten by the federal government. You can apply for these types of loans regardless of income level, but they are especially helpful for people who earn moderate to low incomes and do not have great credit.
Since FHA loans are backed by the government, they do not pose as much of a risk to lenders because the government will cover the loan if the buyer is unable to pay. This is why FHA lenders are able to offer lower minimums down payments and can accept lower credit scores.
The main positive attributes of an FHA loan are:
- Lower credit score requirements: Typically lenders require a credit score of around 700 but it is possible to qualify for an FHA loan with a credit score as low as 500. This means that you do not need a great credit score to purchase the home you want.
- Lower minimum down payment: Most lenders require a 20% minimum down payment in order to buy a home. This means that you have to pay 20% of whatever the purchase price of a home is upfront, at the time of closing. FHA lenders offer much lower down payment minimums of 3.5 % or 10%, depending on your credit score.
If your credit score is 580 or higher, then the minimum down payment for an FHA mortgage loan is 3.5%.
If your credit score is between 500-570, then the minimum down payment for an FHA mortgage loan is 10%.
If you were to purchase a $200,000 home with a typical mortgage loan that required a 20% minimum down payment, then you would need to have at least $40,000 to pay for the down payment.
But, if you have a 620 credit score and you were to purchase the same $200,000 home with an FHA loan that only requires 3.5% down payment then you would only have to pay $7,000 up front.
If you would like to buy a home that requires renovations, you might be able to save thousands of dollars in interest by qualifying for an FHA mortgage that helps you pay for your mortgage and repairs with a single loan.