FHA Loan
Definition
An FHA loan is a mortgage insured by the Federal Housing Administration that allows lower down payments and credit scores than conventional loans. It is designed to help first-time homebuyers and borrowers with limited resources.
Example
A first-time buyer with a 600 credit score makes a 3.5% down payment on a $250,000 home, borrowing $241,250. The buyer pays an upfront MIP of 1.75% ($4,222) at closing plus monthly MIP of approximately $140, which is added to the mortgage payment.
Exam Tip
Key FHA facts for the exam: 3.5% minimum down payment (not zero), MIP required for life of loan (if less than 10% down), FHA insures but does NOT lend money (private lenders originate FHA loans), and the property must meet FHA minimum property standards.
Related Financing Terms
Conventional Loan
A conventional loan is a mortgage that is not insured or guaranteed by a government agency such as the FHA, VA, or USDA. It is originated and funded by private lenders and may be conforming or non-conforming.
VA Loan
A VA loan is a mortgage guaranteed by the Department of Veterans Affairs available to eligible veterans, active-duty service members, and surviving spouses. It offers no down payment and no private mortgage insurance requirements.
Fixed-Rate Mortgage
A fixed-rate mortgage has an interest rate that remains constant for the entire term of the loan, resulting in equal monthly principal and interest payments throughout the life of the mortgage.
Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage (ARM) has an interest rate that changes periodically based on market conditions, typically after an initial fixed-rate period. The rate adjustment is tied to a financial index plus a margin.
Loan-to-Value Ratio (LTV)
The loan-to-value ratio (LTV) is the percentage of a property's appraised value or purchase price (whichever is lower) that is being financed through a mortgage. LTV = Loan Amount / Property Value.
Debt-to-Income Ratio (DTI)
The debt-to-income ratio (DTI) compares a borrower's monthly debt obligations to their gross monthly income. It is used by lenders to determine how much mortgage a borrower can afford.
Frequently Asked Questions
Test Your Financing Knowledge
Practice with exam-style questions to make sure you can apply FHA Loan and other financing concepts.