The Federal Housing Administration, or FHA, is a U.S. government-backed mortgage insurance entity. It provides a financial guarantee for mortgage lenders that offers protection against losses due to homeowner defaults. Since the lenders take on less risk with an FHA-backed mortgage, they can often lower lending requirements than found with conventional loan products, which can be helpful to those buying their first homes. FHA homeowner loans are offered for properties up to four units.
The amount of money you are required to put down on a home can dictate the size, quality and timing of your home purchase. Because FHA loans insure up to 96.5 percent of the home's value, your down payment can be as low as 3.5 percent. This down payment can be used towards the purchase of an older existing home or towards a newly constructed home.
Lenders who agree to offer FHA loans to first-time homeowners agree to abide by limitations on loan fees and administrative costs. Per the Federal Housing Administration, origination fees cannot be more than 1 percent of the mortgage total. This restriction can minimize your closing costs and reduces the variation in closing costs that you may find with non-FHA loans. Additionally, FHA loans allow the bundling of some fees into the mortgage total, which can reduce the out-of-pocket cost of obtaining the mortgage.
As long as you are planning to occupy the residence you want to purchase, you can apply for an FHA-insured mortgage. FHA loans have lower financial qualifications than traditional loan products, which may allow you to obtain a mortgage, even if you have faced a bankruptcy or financial difficulties in the past. The loans may also expand homeownership opportunities if you live in an underserved area. The cost of the FHA insurance is built into your mortgage payments.
Applying for an FHA loan is open to anyone that will be an owner-occupant. If you are considering purchasing a home but do not have sufficient funds for a significant down payment, or you are concerned about some credit blemishes in the past, you can apply for an FHA loan. Comparing multiple mortgage options including an FHA mortgage can help you understand your financing options when you are looking to purchase your first home.