Federal Housing Administration - FHA Helping first-time home buyers learn about the FHA loans.

FHA Loans
An FHA Loan is insured by the Federal Housing Administration (FHA), but the loans are made and funded by a wide variety of lenders all thoughout the United States.  With FHA reducing the lender's risk, the lenders are willing to make low down payment loans to higher risk borrowers that they otherwise might not approve.  FHA is a good option for many first-time home buyers. The FHA loan programs are administered by the U.S. Department of Housing and Urban Development (HUD).

Benefits of an FHA Loan
An FHA loan is a great product for first-time home buyers. Here are just some of the benefits of an FHA loan:

  • Low down payment (just 3.5% of the purchase price)
  • No income limits
  • Don't need to be a first-time home buyer
  • Seller can pay your closing costs
  • Lower minimum credit score
  • Compatible with down payment assistance programs 
  • Compatible with state bond loans
  • Compatible with a gift from a family member or friend
  • Available in all 50 states

Eligibility for an FHA Loan
Qualifying for an FHA loan is often easier than qualifying for other types of loans. You may still be eligible to get an FHA loan with a credit score that is in the mid to low 600's. You'll pay a bit more for the required mortgage insurance if you have a lower credit score.  

From some lenders it is even possible to get an FHA loan if you have not yet developed a traditional credit history.  FHA guidelines allow lenders to build an alternate credit history for a borrower who does not have an established credit history.  An alternate credit history is made by proving that you have paid other bills such as rent, utilities and insurance on time over the past 12 months. Like all loan programs, lenders will need to make sure that your monthly payments are affordable. They will want to see that your monthly housing and other debt payments are not more than 41% of your gross monthly income (before taxes).

FHA and State Bond
It very common for a first-time homebuyer to get an FHA-insured loan that is combined with their local Housing Finance Agency's lower rate. Depending on the interest rate, your state's below-market rate loan program is a always a very good option to explore. Of course, you can also get a market rate FHA loan from pracitically any lender. Do shop around though, as FHA loan rates differ, as well as, the fees that different lenders charge. By working with a lender who specializes in offering your state bond program, you are more likely to get a great rate if you qualify.

FHA Fees
In general, the loan fees on an FHA-insured loan will be the similar to other loan options, but the mortgage insurance may be more expensive than a conventional loan's private mortgage insurance depending on your credit score. An FHA loan has both an up-front mortgage insurance premium and a monthly premium. If you have enough savings to make a 5%, 10% or 20% down payment, then a FHA loan may not be your best option.  If you can avoid the cost of mortgage insurance, you should do so.

If you have a higher credit score, than a Conventional Loan may be a better option. Ask your lender to compare an FHA loan with the other loan programs to see what is the best fit for you.