FHA Loan

An FHA loan is a mortgage insured by the Federal Housing Administration. The government insurance protects the lender if the borrower defaults, which lets lenders accept borrowers that a conventional loan might turn away.

The headline advantages are accessibility: a down payment as low as 3.5% with a credit score of 580+ (10% down for scores of 500-579), and more forgiving treatment of past credit problems.

The trade-off is the mortgage insurance premium (MIP): an upfront charge of 1.75% of the loan amount plus an annual premium paid monthly. Unlike the PMI on a conventional loan, MIP on a small-down-payment FHA loan lasts for the life of the loan — the usual way out is refinancing into a conventional loan once you build about 20% home equity. FHA loans also cap the loan size by county and require the home to pass FHA appraisal standards.

For how FHA compares to the alternatives, see Conventional vs FHA vs VA loans.

Related terms: Conventional Loan, VA Loan, Down Payment.

 
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