FHA Loans: A Comprehensive Guide
Everything you need to know about FHA loans as a Chicago home or condo buyer
Insured by the Federal Housing Administration, FHA loans allow borrowers to put down as little as 3.5% on a home or condo while only having a minimum credit score of 580. Although the monthly mortgage payment will be higher, especially when you add on mortgage insurance, FHA loans are the most common mortgage product for home buyers with a low credit score of limited savings.
- What is the Federal Housing Administration (FHA)?
- Comparing FHA Loans with a Conventional Mortgage
- FHA Loan Limits
- FHA Qualifications
- Types of FHA Loans
The FHA: What You Need to Know
The Federal Housing Administration, or more simply the FHA, was formed to be part of the National Housing Act of 1934 in order to make home ownership more affordable and obtainable at a time when foreclosures were on the rise. Back then, most home loans were capped at 50-60 percent of the home’s purchase price and FHA set a new norm by allowing home buyers to only put down 20%. Over the years, the FHA has evolved even further and as mentioned allows buyers to put as little as 3.5% down.
FHA Loans & Conventional Loans: What’s The Difference?
Conventional loans are not insured or guaranteed by the federal government, which means you’ll need to put more money down when buying a home. Additionally, conventional loans also require a higher credit score, especially if you hope to get the best rate possible. There’s also a good chance you’ll have to pay additional closing costs with FHA loans, which can bump up the amount of money you’ll need upfront slightly.
FHA Loan Limits
If you don’t have a significant savings built up or have a lower than average credit score, buying an extravagant home or condo probably isn’t in your best interest anyway. Even still, FHA loans do have limits, which vary by county. In 2020, FHA loan limits range from $331,760 to $765,600. In smaller, non-coastal cities and rural communities, you’re more likely to have the limit set at $331,760. But in more expensive markets, like San Francisco for example, an upper-tier limit likely applies.
FHA Loan Qualifications
The minimum credit score you’ll need for an FHA loan is 500. However, any score below 580 usually requires a larger down payment, typically about 10% of the purchase price. Stronger credit scores, or anything over 580, usually mean you can put as little as 3.5% down. In addition to a down payment and your credit score, debt-to-income ratio is also considered when applying for an FHA loan in Chicago. FHA loans require your DTA to be less than 50, which means your total monthly debt payments cannot exceed more than 50% of your pre-tax income.
Common FHA Loan Types
Interested in a specialty home loan outside of a traditional FHA loan? Consider these FHA loan types....
Basic Home Mortgage Loan 203(b) - Fixed or adjustable rates; several types of homes are eligible.
203(k) Rehab Mortgage - Provides financing for home purchase and renovation with the same loan. Both purchase and refinance options are available.
Energy Efficient Mortgage - Finances energy-efficient upgrades during a home purchase or refinance. This mortgage product is asp available for new or existing homes.