The FHA loan is the most common, especially for first time home buyers. This mortgage is insured by the Federal Housing Administration (FHA) and will require you to pay mortgage insurance for the life of the loan. Mortgage insurance protects the lender from a loss if the borrower defaults on the loan.
The Bottom Line
Credit Score: Most lenders require at least a 620-credit score. Some lenders will accept a score as low as a 580, but these loans usually offer subprime interest rates which are higher.
Down Payment: You must have some skin in the game, therefore, a down payment of 3.5% is required. Other sources of cash for down payment include financial gifts from family or funds from a Down Payment Assistance Program.
Mortgage Insurance: Because the FHA is an insurer, and not a lender, you are required to pay a mortgage insurance premium (MIP) for the life of the loan. The amount of the premium is included in your monthly mortgage payment. Additionally, there is a one-time upfront fee.
Closing Costs: FHA will allow home sellers, builders and lenders to pay some of the borrower’s closing costs. Closing costs can average between 3-4% of the sales price.
FHA Approved Lenders: Since the FHA is an insurer and not a lender, you will need to get your loan from an FHA-approved lender. Not all FHA-approved lenders offer the same interest rate and costs, even on the same FHA loan.