How do FHA loans work

How do FHA Loans Work

You’ve likely heard about FHA loans in the media, or perhaps a friend recommended you look into getting an FHA loan to buy a home.  FHA loans are government-backed mortgage loans designed to help you purchase a home with fewer financial requirements.  For example, they can be helpful if you have debt or a less than ideal credit score, including experiencing bankruptcy or collections.  One question I get from clients is, “How do FHA loans work?”  Here’s a quick overview to introduce you to this product.

Why do people apply for FHA loans?

FHA loans help homeowners who may not qualify for a traditional mortgage loan.  They are backed by the Federal Housing Administration (the FHA).  That means the government protects your lender against loss if you default on your loan.

What are the requirements to qualify for an FHA loan?

Not everyone or every home qualifies for an FHA loan.  First, the home must meet some requirements, including:

  1. An appraiser approved by the FHA must appraise the home.
  2. The home you are purchasing must be a primary residence, not an investment, rental property, or vacation home.
  3. An approved inspector must look at the property and conclude that it meets minimum property standards.

Second, the borrower must meet specific qualifications:

  1. For a FICO credit score of at least 580, the borrower must make at least a 3.5% down payment.
  2. With a FICO score between 500 to 579, the borrower must put down at least 10%.
  3. Mortgage Insurance is required.
  4. The borrower’s debt-to-income ratio must be less than 43%.
  5. The borrower must have proof of employment and a steady income.
  6. The borrower must move into the home within 60 days of closing.

How much can I borrow with an FHA loan?

Of course, there are limits to how much you will be approved for based on your specific situation, including your debt-to-income ratio, your income, and your job history.  However, there are caps in place even for those in the best cases.  The Department of Housing and Urban Development assesses home values in various regions of the United States.  For high-cost areas like large cities, the agency set the maximum loan amount at $970,800 for 2022.  In lower-cost areas, the limit is $420,680.  There are also set limits for single-unit dwellings versus multiple-unit properties.  You can learn more about the limits for a specific area on

Do FHA loans have better interest rates?

Not necessarily.  FHA interest rates tend to be similar to other conventional mortgages.  You may be eligible for a slightly lower interest rate simply because the government-backed protection makes your loan less risky for the financial institution, so that you may qualify for a lower rate.

If you want to learn more about how FHA loans work and if this is a good fit for you, contact me today!

I take pride in helping my clients find the home of their dreams while making sound financial decisions.  I will work with you through every stage of home buying, from determining your priorities in a new home to learning about ways to finance your mortgage.  Contact me today to get started at 541-840-1909 or at this link.  

Own Oregon Real Estate