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FHA Loans

If you're looking to buy a first home, FHA mortgages are a popular option.

As the agency notes on its website, the FHA program has been helping Americans buy their own homes since 1934. FHA loans are backed by the Federal Housing Administration, which is part of the U.S. Department of Housing and Urban Development (HUD). The loan program was established during the Great Depression to encourage homeownership in a nation of renters, and it worked. In fact, most FHA loans go to buyers who are buying their first home. The program has allowed middle-class to low-income buyers and people with less-then-stellar credit to get home loans with relatively small down payments.

The FHA does not actually lend money to homebuyers. Borrowers apply for home loans with FHA-approved lenders such as banks, mortgage companies and credit unions, which use HUD guidelines to screen the applications. If the lender approves the loan, the loan is funded by the lender and insured by the FHA. With the mortgage backed by the government, the lender doesn't face as much risk and is more willing to approve the loan.

Depending on where the property is located, the limits on FHA loans range from $275,665 to $636,150 for single-family homes. Areas with higher housing costs have higher limits on FHA loans, while those with less expensive housing costs have lower limits. Both FHA and conventional mortgage rates are set by private lenders. Interest rates vary among mortgage lenders, with differences up to half a point.

Applying for an FHA Loan

FHA home loans can be obtained from any FHA-approved provider, including banks and credit unions. Unlike conventional loans, these mortgages are backed by the government. FHA loans were created to help people buy a home even if they could not afford a 20 percent down payment and did not have outstanding credit. Knowing how they differ from conventional loans can help you get a better deal on your mortgage.

In order to get an FHA loan, you'll likely have to have a credit score of at least 580. Under special circumstances, borrowers with lower scores can also be approved. You'll also have to demonstrate a stable, sufficient income and make a down payment of at least 3.5 percent of the home's purchase price. (If you can pay more, do so -- the more equity in your home, the better.) Some lenders may have higher minimum credit score requirements.

The average credit score of an FHA borrower in 2015 was 680, which is considered "fair." But FHA lenders look at the whole application package: your payment history, down payment, credit, income, assets and more. If your credit is spotty and your income low, you can make up for it with a larger down payment.

To apply for an FHA loan, you'll need to gather your bank accounts, retirement accounts and investment statements, two pay stubs and W-2s for the last two years (if you're a wage earner) or tax returns (if you're self-employed). Your lender will help you complete a loan application and will pull your credit reports. (You can prepare for this process by paying off any liens against you or outstanding debts in collections before you start the loan application process.)

You should get a few different FHA mortgage quotes from competing lenders. You can check quotes online, contact companies by phone or visit them in person. Keep in mind that not all mortgage lenders are approved to underwrite or fund FHA home loans.

Borrowers who want an FHA mortgage need to work with an FHA-approved lender. The HUD website includes a searchable list of FHA-approved lenders. Such lenders usually advertise this service, so options aren't hard to find.

Next, talk with the loan officers of a couple of the lenders with the most competitive quotes. Your loan pro should walk you through the application process -- most lenders interview applicants, complete the forms online, submit the application electronically and come to a decision in moments. The loan officer will then give you a list of items needed to finalize the approval.

You can usually close quickly if you give the lender a complete application, including proof of income and documentation of your assets, and have no credit or employment problems. If your circumstances are more unusual -- if you're self-employed or have no credit history, for example -- underwriting may take longer. On average, FHA home loans close in about 45 days. To make it easier to close, experts recommend you get preapproved for a loan before looking at homes.

Other home loan programs

If you want to buy a home but can't afford a large down payment, you have other options besides the FHA program. Both Fannie Mae and Freddie Mac offer mortgages to eligible first-time homebuyers, and you can get a conventional loan with 3 percent down.

The USDA also has a special program for qualified home buyers in rural communities. USDA loans allow borrowers to get a mortgage with no down payment if they buy a home in a rural area or one that qualifies for a USDA loan.

For its part, the U.S. Department of Veterans Affairs insures VA loans for eligible service members and veterans. It sometimes insures mortgages for family members as well. These loans don't require down payment or mortgage insurance.

Borrowers with good credit should probably seek a conventional mortgage with a down payment of 10 percent rather than an FHA loan, in part because they won't have to buy mortgage insurance. You should probably speak to more than one lender about your options and compare mortgage quotes before committing. Once you do, it shouldn't be too long until you're getting the keys to your own home.

References

FHA loans under HUD https://portal.hud.gov/hudportal/HUD?src=/buying/loans

FHA Loan Limits. https://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/lender/origination/mortgage_limits

U.S. homeownership through the ages. Ancestry.com. https://blogs.ancestry.com/ancestry/2017/03/23/homeownership-through-the-ages-a-look-at-ownership-then-and-now/

U.S. Department of Housing and Urban Development. https://portal.hud.gov/hudportal/HUD

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