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What Is An FHA Loan And How Does It Work?

What Is An FHA Loan And How Does It Work?

If you’re looking to buy a home but don’t have the best credit, an FHA loan could be your answer. The Federal Housing Administration (FHA) offers affordable mortgages for buyers who can’t afford the high down payment or high monthly payments associated with conventional loans. The money you borrow is a mortgage loan which is then paid back over time.

What Is An FHA Loan?

FHA loans are government-insured mortgages. If you qualify for an FHA loan, it’s a good idea to take one because they’re designed to help borrowers who can’t afford a traditional mortgage.

FHA loans are designed for low- to moderate-income borrowers and people who need a little extra help with their down payment. They make it easier for first-time homebuyers who may not have saved up enough money for the down payment on their own (as much as 3.5% of the house price).

FHA loans also make it possible for borrowers with bad credit or no credit history at all to get mortgages if they can show that they’ve been paying rent on time over the past two years (with no late payments) and if they can show that their income level is stable enough to afford to make regular mortgage payments each month without having those payments deferred due to financial hardship or other obstacles.

How FHA Loans Work

Let’s take a look at how they work:

  • You borrow money from an FHA-approved lender to buy or refinance your home. Your lender will charge an upfront loan fee of 1% – 4% plus points based on your credit score, closing costs, and other factors.
  • The FHA ensures that you will be able to pay back this loan if you default on it, so lenders can afford to make it more affordable than conventional mortgages with higher down payments and lower interest rates. However, some restrictions apply: For example, borrowers cannot obtain 100% financing through an FHA loan—the property must be owner-occupied (vs investor) or owner occupied with no rental history within past 2 years prior purchase date; also homeowners must have at least 3% equity in their home before purchasing another property (for vacant land purchase).

How To Qualify For An FHA Loan

If you’re interested in taking out an FHA loan, a few things will affect your chances of qualifying.

  • Credit score: Your credit score must be at least 580 to qualify for an FHA loan. If it’s lower than that, you’ll probably have better luck with a conventional loan from a local bank or credit union.
  • Down payment: The minimum down payment for an FHA-backed mortgage is 3.5%. If you don’t have enough saved up for this amount, consider making extra payments on any high-interest debt so your savings account can grow faster!
  • Income and employment status: Your annual income must exceed the area median income by 10% or more; if it doesn’t, consider looking into other types of mortgages like VA loans or jumbo loans instead (these require higher down payments). You also need to show proof of stable employment history over the past 2 years—at least 24 months’ worth—and never having been delinquent on mortgage payments before (if so, then look into programs like HARP).

How To Find An FHA Lender And Apply For An FHA Loan

To find an FHA lender, you can use the following resources:

  • The Department of Housing and Urban Development’s list of approved lenders.
  • Credit unions that offer FHA loans.
  • Mortgage companies that specialize in FHA loans and are approved by HUD to do so.

Once you’ve found a lender, how do you actually apply for an FHA loan? You’ll need basic information about yourself, such as your credit score, income level, and employment status, along with details about the property, like its location and price tag.

After filling out this information online or at a local branch office (depending on which type of lender you choose), the next steps will depend on whether or not your application is accepted by the lender right away or if it needs further review before approval—in which case they’ll request additional documentation from you regarding any outstanding debts or past financial problems while also wanting proof of employment history over the past two years (if applicable).

Let us guide you home.