The ABCs of FHA Mortgage Loans

August may be the month of back to school sales, but it's also a good time to snag a deal on a house.

Home price cuts are most common in August, according to residential real estate site Trulia. That’s when the sizzling summer home-buying season begins to cool and nearly 14 percent of home sellers drop their asking prices.

If you’re looking to score a back-to-school bargain on a house, an FHA home loan can help you make the grade. Because they are insured by the Federal Housing Administration, FHA loans generally have lower down payments, lower closing costs and lower credit requirements than conventional loans.

Before you get lost in the alphabet soup of home mortgage options, from VA (Veterans Affairs) to USDA (U.S. Department of Agriculture) loans, learn the ABCs and (D’s) of FHA mortgage loans.

Here’s what you need to know about FHA home loans.

‘A’ for accessible

You don’t need a straight-A credit history to qualify for an FHA home loan. Conventional loans typically require a credit score above 620, but you may be approved for an FHA loan with a score as low as 500, under certain terms.

Of course, a higher credit score means a better interest rate. And a minimum score of 580 is required to get the lowest down payment option.  Keep in mind that you will still need to show a history of stable employment and steady income to secure an FHA loan.

‘B’ for budget-friendly

Thanks to their government backing, FHA home loans are at the top of their class in terms of affordability. Their low upfront costs make them a popular option for first-time homebuyers and for people re-entering the housing market.

You can secure an FHA mortgage with as little as 3.5 percent down, and the FHA allows for flexibility in how closing costs are covered. You can ask the home seller or your FHA-approved lender to pay for closing costs, or you can use funds from your personal savings, a gift or grant. While base FHA interest rates tend to be low, required mortgage insurance and other costs can increase your monthly payments.

'C' for conditional

While individual home loan terms will vary by lender, the FHA spells out straightforward rules and conditions for its loans. For one, the home you are buying must be your primary residence. Additionally, there is a loan limit on how much you can borrow. The loan ceiling is adjusted annually and varies by state and county.

Perhaps the most significant distinction of an FHA home loan is the mortgage insurance requirement. An FHA loan calls for both an upfront and an annual premium. The upfront premium — currently 1.75 percent of the loan amount — is paid at the time of closing. On a $300,000 home, for example, you would pay $5,250 (.0175 x $300,000) upfront, which can be built into the mortgage. The annual insurance premium, which varies based on the loan term, is paid monthly.  

‘D’ for dynamic

From funding home improvements to providing retirement income to streamlining refinances, FHA mortgage programs can cover many subjects of your life, in addition to fulfilling basic mortgage needs. Talk to an FHA-approved lender for more information on FHA 203(k) insured loans, home equity conversion mortgages, and streamline refinances.

To find out more about FHA mortgage loans and other loan options, contact a Zions Bank mortgage loan officer.

Zions Bank home loans are subject to credit approval. Terms and conditions apply.