FHA

How you can buy a home with a low-down-payment FHA mortgage

Many people consider homeownership part of the American dream — but can’t dream of landing a traditional mortgage. That’s why FHA loans exist.

These loans that are backed by the Federal Housing Administration are popular with first-time buyers and those with lower incomes. While you might need a credit score of 620 for a conventional loan, you could be approved for an FHA loan with a score of 500. And you could be eligible for a down payment of only 3.5%.

They’re not just for new buyers, either. You can use your FHA loan to refinance your mortgage or even repair an older home.

Sound appealing? FHA loans do offer some attractive features, but they may not be right for everyone.

How do FHA loans work?

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Congress established the Federal Housing Administration in 1934 to help borrowers get a mortgage, especially those who would otherwise have trouble qualifying.

FHA loans are insured by the government agency. So while the loans are issued by private lenders, the FHA is taking on the risk. If you can’t pay your debt, the government steps in to pay the lender.

With less risk involved, lenders have the confidence to be a bit more lenient with their underwriting standards. Even if they don’t have pristine credit, today’s borrowers can secure FHA loans with historically low mortgage rates and lower down payments.

But the FHA limits how much you can borrow, based on where you live.

The maximum FHA loan for a single-family home in a low-cost county is $331,760. But in more expensive housing markets, that number will rise higher toward the upper limit of $765,600. The Department of Housing and Urban Development (HUD) offers a search engine to help you find the limit in your area.

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