What is an FHA Loan and How Do You Apply?

Trying to figure out what an FHA loan actually is?

It’s a mortgage proposed by a well-known organization namely, Federal Housing Administration. FHA is popular among borrowers because it lets you easily qualify for the loan even with a low credit score.

Real estate agent with house model and keys
Real estate agent with house model and keys

Hence, it proved to be a solution to problems encountered by many first-time homebuyers who face credit score challenges. This article covers the fundamentals of FHA loans you should know before applying as an applicant.

You Will Learn

FHA loan vs. a Conventional loan?

Due to a green signal given to applicants with a lower credit score, an FHA loan is easy to qualify for, than the conventional loan that allows a bit lower down payment.

Credit Scores

An applicant with a credit score as low as 500 can avail FHA loan.  You can be eligible for an FHA loan after paying a 10% down payment in case if your credit score is somewhere between 500 to 579. In the case of possessing a credit score of 580+, you’ll get it after paying as low as a 3.5% down payment.

Comparatively, your credit score must be 620+ with a down payment between 3%-20% to avail a conventional loan.

Debt-to-income (DTI) ratios

Your DTI ratio must be under 50% to make it for an FHA loan. Conventional loan often allows DTI of above 50%.

Mortgage Insurance

Mortgage insurance intends to secure a lender in case of default. For a conventional loan, you are asked to pay for the mortgage insurance if you made a down payment of below 20%. On the other hand, to fulfill the requirements of an FHA loan, you must have to pay it regardless of the down payment percentage.

Loan Limits

Both of the types limit the amount you can borrow. The limit varies as per the country and may change annually.

Property Standard

You get the approval of FHA loan only if you have to keep that house as your primary dwelling. For a conventional loan, you can buy a house for any purpose e.g. property investment.

Types of FHA loans

FHA offers different mortgage programs suitable for different needs of borrowers. They are as under:

Basic Home Mortgage Loan 203(b)

It is the standard loan program mend essentially for a single family home loan. It lets you purchase or refinance your primary dwelling.

You must meet the fundamental FHA credit qualifications to apply for this loan. You must also be eligible for 96% financing. You are supposed to pay an annual premium.  Basic Home Mortgage Loan 203(b) functions for one to four unit property structures.

Home Equity Conversion Mortgage

If you are 62+ then this FHA loan program is certainly for you! A mortgage program offering senior homeowners (who are 62 and above) to convert their home equity into cash while keeping title to their home, is a choice of senior homeowners.

You are given a choice how to withdraw the funds. You can choose to withdraw them a line of credits or as a fixed monthly amount. Not only this, you have an option to go for a combination of both choices.

203(k) Mortgage Program

203(k) Mortgage Program affects the cost of your particular renovation into the loan. This program lets you borrow some amount for home purchase as well as for home improvement. It means it can certainly make a huge difference in case you don’t have much cash after you pay for the down payment.

Energy Efficient Mortgage Program

Energy Efficient Mortgage Program is quite similar to 203(k) Mortgage Program in terms of practicality. It is another beneficial mortgage program facilitating you to pay for your home’s renovation- intended to make it energy efficient by providing some extra funds. Hence, it is particularly aimed at decreasing your utility bills.

Concept behind this offer is that operational cost for energy efficient homes is low, decreasing the overall cost of utility bills. This way you’ll be able to save more part of your income to pay for the loan.

Section 245(a) Loan

If you expect an increase in your income, then this program is all-time best for you! Under which the graduated mortgage payment begins with low payments per month and rises with the passage of time.

A schedule for a monthly increase in the principal payments has to be set by Growing Equity Mortgage intended to make loan terms shorter.

Title I Property Improvement Loan

This type of loan facilitates you the finances to buy an already built house or repair a home already existing.

Who can Qualify for an FHA Loan?

Verifiable Income

At the bare minimum, regular income that can be verified/authenticated by tax returns or pay-stubs is the foremost requirement to qualify for an FHA loan.

Able to Afford Housing Payment

Your mortgage payment must be under 35% of your income. This mortgage payment together with monthly debt payments such as credit cards or car loan etc. must be under 48% of your income.

Required Down Payment

You need to pay a down payment of a minimum of 3.5% to get qualified. You’ll practically have to save around 6% of your home’s purchase price to make up the closing costs. An upfront mortgage insurance premium equivalent to 1.75% of the home’s value is included in this price.

Credit History

 As an applicant for an FHA loan, you are required to have at least an established credit history and proof of employment. The home must also be your primary dwelling.

The minimum FICO score you need to qualify for this loan is 580. However, FHA is an insurer, not a lender and the lender prescribes the minimum credit score for you. Conventionally, this value was usually set at 700 by the lenders but presently, it sits around 640 for an FHA loan. 

How to Apply for an FHA Loan?

Application for an FHA loan requires some financial and personal documents including:

  • Proof of being a permanent resident
  • Proof of being eligible to work in the U.S.
  • Your Social Security Number.
  • Bank statements.

Your lender may automatically retrieve some documents such as tax returns and employment records.

Where do I get an FHA loan?

Here we present you a table comparing famous lenders in 2021 so that you may find a best-fit match:

Lender NerdWallet Rating (out of 5) Minimum Credit Score Minimum Down Payment
Quicken Loans 4.5 580 3.5
AmeriSave 4.5 600 3.5
PennyMac 4.5 580 3.5
Carrington 3.0 500 3.5
Caliber 3.5 580 3.5
Alterra 3.5 N/A 3.5
Primeleading 3.5 580 3.5


If you are not sure which lender is a good fit for your needs, then click here, answer a few questions and find which lender can be most suitable for your needs.


So now you know how an applicant with a low to medium income can benefit from an FHA loan in 2021. It is clear that the time you spend preparing your house today can ultimately save you time later when filling out some actual forms of the loan application.

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