What Is a Federal Housing Administration (FHA) Loan?

A Federal Housing Administration (FHA) loan is a home mortgage that is insured by the government and issued by a bank or other lender that the agency approves. FHA loans require a lower minimum down payment than many conventional loans, and applicants may have lower credit scores than are usually needed. The FHA loan is designed to help low- to moderate-income families attain homeownership. As a result, they are particularly popular with first-time homebuyers.

Benefits of FHA Mortgage Loans

Looking to purchase a house in Los Angeles or anywhere in California but can't apply for a traditional mortgage? FHA loan is an excellent option. The guidelines and requirements for an FHA mortgage are much more lenient: a low FICO score and small down payment are OK.

• Perfect for the First-Time Home Buyers: This is an ideal mortgage loan for first-time home buyers. These loans are popular among first-time buyers because of low down payments and flexible qualifying guidelines.
• Low-Interest Rates: FHA loans have lower interest rates. This happens because the lender takes less risk.
• Finances for Home Repairs: Need some extra funds to repair the house? The FHA has a particular loan for that. It is not based on the home's current value but on the projected one.
• Gift Fund as a Downpayment: You can use a gift fund as 100% of a down payment on your house (for primary residences only).

How to qualify for an FHA loan

To be eligible for an FHA loan, borrowers must meet the following lending guidelines:

• Have a FICO score of 500 to 579 with 10 percent down or a FICO score of 580 or higher with 3.5 percent down.
• Have verifiable employment history for the last two years.
• Have verifiable income through pay stubs, federal tax returns, and bank statements.
• Use the loan to finance a primary residence.
• Ensure the property is appraised by an FHA-approved appraiser and meets HUD guidelines.
• Have a front-end debt ratio (monthly mortgage payments) of no more than 31 percent of gross monthly income.
• Have a back-end debt ratio (mortgage plus all monthly debt payments) of no more than 43 percent of gross monthly income (lenders could allow a ratio up to 50 percent, in some cases).
• Wait for one to two years before applying for the loan after bankruptcy or three years after foreclosure (lenders might make exceptions on these waiting periods for borrowers with extenuating circumstances).