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Last updated: January 1
FHA loan terms you should know
Looking to buy a home with an FHA loan? You’ll likely encounter terms that aren’t a part of your everyday vocabulary. But becoming familiar with them can help make the process of buying a house a lot easier. Here’s a primer.
You’ve probably heard this one, but it bears mentioning. When you take out a loan, the down payment — or how much you “put down” — is the amount you pay upfront, according to Bankrate. Typically, you’d pay up to 20% on a conventional loan. An FHA loan, however, allows you to put down a very low amount.
A home loan term is how long you’ll be making mortgage payments, says the Federal Housing Administration (FHA). The number of months your loan term spans comes down to the type of mortgage you get. Conventional loan terms can be in the range of 10, 15, 30 or 50 years. FHA loan terms are either 15 or 30 years.
The mortgage principle is the entire amount of money you borrow from a lender to buy a house, according to Forbes. You pay the principal back monthly.
The interest rate is a percentage of the principal that you pay monthly, says the Consumer Financial Protection Bureau (CFPB). Interest rates can either be fixed or adjustable, adds the FHA. If it’s fixed, it’ll stay the same until you pay off the loan or refinance. Adjustable rates can go up and down depending on the market.
Homeowners insurance helps pay to repair or replace your house, structures on your property and personal belongings if they’re damaged by a covered incident. These include fires, theft, windstorms, falling objects, water damage from plumbing and more. It can also help protect your liability in case a guest is injured on your property and sues.
Home insurance isn’t required by law, but your lender may require you to buy it.
If you pay less than 20% on a conventional loan, your lender will likely require private mortgage insurance, says the FHA. Since you’re putting in less money, it helps protect the lender in case you can’t make payments. FHA loans require mortgage insurance no matter what you put down.
An escrow account is typically required by mortgage companies to pay for costs related to your home, according to Bankrate. They are set up by a third party to manage transactions.
There are two types of escrow accounts. One is used to make an initial deposit to buy a home, and the other is to pay home insurance and taxes. New homeowners making a down payment of less than 20%, or using an FHA loan, will typically need an escrow account.
How does an FHA loan work?
FHA loans are designed to financially help new homebuyers. However, they don’t lend money directly to you, says the CFPB. Instead, FHA loans insure approved private lenders, which in turn allows them to lower down payment requirements.
Requirements & eligibility for an FHA loan
To qualify for an FHA loan, you need to have:
- Mortgage insurance
- A steady income
- Proof of employment
- A debt-to-income ratio no greater than 43%
Additionally, your house needs to be your primary residence.
To qualify for low down payments, you need to meet certain credit score guidelines. For instance, a FICO® score of at least 580 could qualify you for a down payment as low as 3.5%. Scores between 500 and 579 require a 10% down payment.
But FHA requirements don’t just look at your FICO® score. They also weigh factors that predict whether applicants will make payments — bankruptcies, foreclosures and other financial history.
FHA loan limits
FHA lending limits differ from county to county and are recalculated each year. They’re determined in part by location and whether the house is single or multi-family. High-cost areas tend to have higher limits than low-cost areas, according to the FHA.
For example, as of 2022, FHA limits for a single-family in a low-cost area is a little more than $420,000, and almost $1 million in a high-cost area.
FHA loan vs a conventional loan
HA-backed loans have easier requirements than conventional loans, according to Bankrate, particularly when it comes to credit scores.
But another key difference between the two loan types has to do with down payments and mortgage insurance.
Paying less than 20% down on a conventional loan requires mortgage insurance, but you can always remove it once your home gains enough equity. On an FHA loan, however, you need mortgage insurance no matter what you put down, and it can’t be removed even if your home gains equity. It would stay until you either pay off the mortgage or refinance with a conventional loan.
FHA loan FAQs
Remember, on an FHA loan you have to pay mortgage insurance no matter how much you put down. For this reason, it’s not necessary to put down 20%, says the FHA. Depending on your credit score, it is better to enjoy the benefits of a much lower down payment.
An FHA loan typically includes property taxes, home insurance, mortgage insurance and special assessments. Depending on your circumstances, you may also have to pay for flood insurance, HOA fees, ground rent and expenses related to secondary financing.
How to tell if you’re eligible for an FHA
More homeowners qualify for an FHA loans than conventional loans, given their lax parameters. Speak with a lender to see if you’re eligible and find out how much you can afford. You can visit Mortgage Reports to get started.
Importantly, make sure to take the time to gauge whether FHA loans versus conventional loans are right for you. Experts can help you weigh the costs and benefits of each, according to your current financial picture. Whichever route you choose, Allstate can help you find quality home insurance at an affordable price to help you meet loan requirements.