FHA Loans: A Plain Guide to How They Work

What an FHA loan is

The Federal Housing Administration, part of HUD, does not lend money. It insures mortgages made by participating lenders like MortgageOne. Qualifying borrowers may be able to make a low down payment. Credit, property and program requirements apply.

The cost of that flexibility is mortgage insurance. FHA loans carry an upfront premium, which is usually added to the loan, and an annual premium paid as part of the monthly payment. FHA also sets loan limits that vary by county.

Who it tends to fit

• Buyers with a smaller down payment, including money gifted by family
• Buyers whose credit history has a few rough patches or is still short
• Buyers whose debts are a bit high compared with their income
• Buyers of a two to four unit property who will live in one of the units

FHA is not only for first-time buyers. It is also not always the cheapest choice. With strong credit and a larger down payment, a conventional loan often costs less over time, so it is worth comparing both.

What to gather

• Your last 30 days of pay stubs and two years of W-2s, or tax returns if you are self-employed
• Two months of bank statements, every page
• A photo ID
• If family is helping: their name and relationship to you, so a gift letter can be prepared
• Twelve months of rent history, if you rent
• A short written explanation for any past credit problem, with dates

Common snags

• Mortgage insurance that stays. With a small down payment, the monthly mortgage insurance on most FHA loans lasts for the life of the loan. Refinancing into a conventional loan may remove it if you qualify.
• Appraisal repairs. The FHA appraisal also checks basic health and safety items, such as the roof, utilities and peeling paint on older homes. Some repairs may need to be finished before closing.
• Occupancy. FHA is for a home you will live in. It is not for a rental you will not occupy.
• Condos. A condo usually needs FHA project approval or a single-unit review. Check before you write an offer.

Your next step

Ask for FHA and conventional side by side: the payment, the mortgage insurance and the cash to close for each. The better choice is usually clear once both are on one page.

When you want to talk it through, book a short phone call with Zak on Chris Lamm’s team at MortgageOne. No credit check is needed for a first call, and you can bring as many questions as you like.