The FHA mortgage program enables home buyers to purchase a home with a down payment low as 3.5%, significantly lower than the 10% - 20% down payment required by many standard mortgage programs. Saving money for a down payment can be one of the biggest obstacles to buying a home so the program can be very useful for people with limited funds. While the FHA program requires a 3.5% down payment, borrowers can combine the program with a gift or down payment assistance program to buy a home with no personal financial contribution. For example, you could use a $96,500 FHA loan and a $3,500 down payment grant to buy a $100,000 with minimal personal funds. By reducing the down payment and personal financial contribution required to buy a home, the FHA program makes home ownership more affordable for more people.
The interest rate on an FHA mortgage is typically .125% - .500% lower than the interest rate for many other low or no down payment mortgage programs. The interest rate is lower because the program is backed by the government and borrowers are required to pay a mortgage insurance premium (MIP), which provide additional protection for the lender in the event the borrower cannot pay back the loan. The lower interest rate on an FHA mortgage reduces your monthly mortgage payment and potentially saves you thousands of dollars in total interest expense over the life of the loan.
The FHA mortgage program uses more flexible borrower qualification requirements including a lower minimum required credit score and a potentially higher debt-to-income ratio. The minimum credit score required to qualify for an FHA mortgage is 580, which is lower than most mortgage programs. And if you make a down payment of at least 10% of the property purchase price, the minimum required credit score is as low as 500. Additionally, although the standard debt-to-income ratio limit for the FHA program is 43% (lower than other programs), applicants with stronger financial and credit profiles may be able to qualify for a mortgage with a debt-to-income ratio of up to 55%. The debt-to-income ratio represents the maximum percentage of a borrower's monthly gross income that can be spent on total monthly housing expense (mortgage payment plus taxes and insurance) plus other monthly debt such as credit card, student and auto loans. The higher the debt-to-income ratio, the larger the mortgage you can qualify for.
Some low or no down payment mortgage programs require the property you are buying to be located in a certain area to qualify for specific elements of the program. For example, borrower income limits may apply if the property is located in one area but the limits do not apply if the property is located in a different area. The FHA mortgage program does not have a property location requirement, making it simpler to use. The program applies to one-to-four unit owner-occupied properties located anywhere in the United States.
The program does not apply a limit to how much money a borrower can earn. Several other low or no down payment mortgage programs use a maximum income limit to determine borrower eligibility. By not using a borrower income limit, the FHA program is accessible to more potential home buyers.
FHA mortgage program participants are required to pay an upfront and ongoing monthly FHA mortgage insurance premium (MIP). FHA MIP pays for insurance that protects lenders in the event that borrowers default on their mortgage. Although it can be added to the mortgage amount, the upfront fee increases your closing costs while the ongoing monthly fee increases your total monthly housing expense. The upfront FHA MIP for most mortgages is 1.75% of the loan amount while the ongoing MIP depends on the loan amount, loan-to-value (LTV) ratio and mortgage term. FHA MIP is an extra cost that borrowers do not pay with standard mortgage programs although many low or no down payment mortgage programs require borrowers to pay monthly private mortgage insurance (PMI) which is similar to the ongoing fee. Unlike FHA MIP, however, PMI does not require an additional up-front fee and PMI is removed when the loan-to-value (LTV) ratio falls below 78% as borrowers pay down their mortgage balance or the value of their home increases. If your loan-to-value (LTV) ratio when you obtain your mortgage is greater than 90.0%, you are required to pay ongoing fee over the life of the loan and it cannot be removed. Depending on your credit score and other factors, the cost the ongoing MIP may be less than the cost of PMI. For example, for borrowers with lower credit scores (below 700) the cost of ongoing FHA fee is usually less than the cost of ongoing PMI for the same mortgage. For borrowers with higher credit scores, the cost of the ongoing MIP may be higher than PMI for a similar mortgage. Before selecting a loan program and lender, borrowers should understand how FHA MIP impacts their up-front and ongoing mortgage costs.
There are limits on the size of loan you can obtain through the FHA mortgage program. FHA loan limits vary by county and by the number of units in the property being mortgaged. In the contiguous U.S., loan limits for a single unit property such as a home or condominium range from $314,827 to $726,525 for high cost areas and the limit for a four unit property ranges from $605,525 to $1,397,400. In Alaska, Hawaii, Guam and the U.S. Virgin Islands loan limits range from $1,089,775 for a single unit property to $2,096,100 for a four unit property. Home buyers who live in more expensive areas of the country may find that the loan limits restrict their housing options. FHA loan limits are less of an issue for borrowers looking to buy less expensive homes.
Review our comprehensive overview of the FHA mortgage program including borrower qualification requirements and other key program information such as property eligibility and FHA loan limits.
Use our FHA Mortgage Qualification Calculator to determine what size FHA loan you can afford based on your income and debt. The calculator also indicates the FHA loan limit in your county as well as the upfront and ongoing FHA mortgage insurance premium (MIP) based on your mortgage amount and loan-to-value (LTV) ratio.
FHA loans are provided by traditional lenders such as banks, mortgage banks, mortgage brokers and credit unions. Use our rate table to review updated FHA mortgage rates and fees for lenders in your area. Comparing rates from multiple lenders is the best way to save money on your mortgage.
Review and compare multiple government-backed and conventional low or no down payment mortgage programs to understand key program benefits and borrower eligibility requirements.
FHA Mortgage Program: https://www.hud.gov/buying/loans