What Are Government Mortgage (FHA) Loans?

When it comes to purchasing a home, there's no one-size-fits-all mortgage. The best loan for you can depend on your immediate needs, financial means and long-term goals.

First-time homebuyers, in particular, have found Federal Housing Administration loans to be a favorable option on their path to homeownership. Here is everything you need to know about this popular government mortgage, from its benefits to eligibility requirements.

What are FHA loans?

The Balance explained that FHA loans are backed by the Federal Housing Administration , but issued by private lenders. The history of the FHA dates back to the Great Depression, when the housing industry was struggling. This government- backed loan helped more borrowers buy homes and stimulated the market, and is still a viable option for homebuyers today.

As of Jan. 15, 2020, the agency insures 7.95 million single-family homes and more than 14,000 multifamily properties. In fact, The Mortgage Reports found that almost 1 in 5 U.S. homebuyers  used an FHA loan in 2019. Government mortgage loans have helped make homeownership more accessible, especially during times of economic strife.

Benefits of government mortgage loans

Part of what makes FHA loans popular are the relaxed qualifying criteria. According to Business Insider, consumers with credit scores as low as 580  are considered eligible. It's possible that consumers with scores lower than that may also qualify, but are usually required to submit a larger down payment.

While other loan options require a borrower's debt-to-income ratio to be below 36%, some FHA lenders will stretch that to 43%. Lower credit score requirements and higher debt-to-income ratios means FHA loans are an attractive option for homebuyers without a strong credit history.

FHA loans are a great option for first-time homebuyers.

Not only are government backed mortgages easier to obtain, but they come with some monetary perks. Borrowers with credit scores of 580 or higher are eligible to make a down payment as small as 3.5%. This is a significant decrease from the usual 20% down required with a conventional loan.

FHA loans are an affordable, flexible option for any homebuyer, but are especially beneficial for first-time buyers without a high credit score. This government-backed loan can be used to purchase single-family residences, multi-unit properties, condos and even manufactured homes.

What you need to apply

If you do apply for an FHA loan, lenders will still require information on your financial history. While qualifying criteria, like credit scores, are more relaxed than other loans, some lenders may set their own application standards. 

Finally, if you do receive a government mortgage, you must pay FHA mortgage insurance. Mortgage insurance is typically required when borrowers put down less than 20% to protect the lenders from loss in case the borrower defaults.

According to Bankrate, the upfront mortgage insurance premium  is usually 1.75% of the loan amount and can be rolled into the total financed amount. The annual mortgage insurance premium is anywhere between 0.45% and 1.05% of the loan amount and initial loan-to-value ratio and is paid monthly.

For more information on FHA loans, reach out to your local Vectra Bank representative today.

^{Loans subject to credit approval. Terms and conditions apply. See banker for details.}