Common Misconceptions About FHA Home Loans

© 2011, Brandon Cornett. All rights reserved.

FHA home loans are a popular financing strategy for home buyers. They’re especially popular with first-time buyers who don’t have much of a down payment saved up. But FHA loans are also commonly misunderstood. Here are some of the biggest misconceptions about these loans.

First, a quick definition. An FHA loan is simply a mortgage loan that’s insured by the Federal Housing Administration. The FHA is part of the Department of Housing and Urban Development, better known as HUD. This government agency insures mortgage lenders against losses resulting from borrower default. This makes the lenders more inclined to use the program, and to give loans to people who might not otherwise qualify for a mortgage.

Myth #1: Anyone can qualify for an FHA loan.

Truth: Not everyone will qualify. Generally speaking, it’s easier to qualify for an FHA home loan than a conventional mortgage loan. But that doesn’t mean they’re available to everyone. In fact, the Department of Housing and Urban Development (HUD) has recently tightened up their lending standards for FHA loans. One of the changes affects people with low credit scores. If your credit score is below 580, you’ll have to make a larger down payment. If your score is way below 580, you probably won’t get approved for the loan. With good credit, you’ll still have to make a down payment of at least 3.5% to get approved. You’ll also need to document your income and expenses, to show that you can afford the monthly payments.

Myth #2: You can get an FHA loan with no money down.

Truth: In the current economy, you can’t get any kind of loan without making a down payment of some kind. The days of “easy credit” and “no money down” disappeared when the housing bubble burst. The minimum down payment for an FHA loan is currently 3.5%. And, as mentioned earlier, you’ll need a credit score of 580 or higher to qualify for the 3.5% down payment. If your score falls below that cutoff point, you’ll have to put 10% down.

Myth #3: FHA loans are safer, because the government will bail you out if you fall behind.

Truth: Wishful thinking. If you fall behind on an FHA home loan, you can be foreclosed upon — the same as any other type of loan. Remember, the FHA is not the one giving you the money. You must apply for one of these mortgages through an FHA-approved lender. The government just insures the lender against losses resulting from borrower default. So the lender can still foreclose on you, if you fail to make your payments. As an FHA borrower, you might have more workout solutions and modification options available, but that’s about it. The FHA will not “bail you out.” So make sure you buy an affordable house!

Where to learn more:

FHA fact sheet at the Home Buying Institute

FHA guide on the HUD website

FHA Resource Center on the HUD website

Federally insured loans offer certain advantages to home buyers. But they are not a risk-free path to homeownership. As a borrower, you are still responsible for making your payments on time. If you would like to learn more about FHA loans and how they work, refer to the resource links provided above.