An FHA loan is a type of mortgage loan that is insured by the Federal Housing Administration (FHA). This means that if the borrower defaults on the loan, the FHA will cover the lender's losses, making it less risky for lenders to lend to borrowers with less-than-perfect credit or smaller down payments.
One of the biggest benefits of an FHA loan is that it allows borrowers to make a lower down payment than most conventional loans. For example, a borrower can put down as little as 3.5% of the home's purchase price with an FHA loan, compared to 10-20% for a conventional loan.
Additionally, FHA loans typically have more lenient credit score requirements compared to conventional loans. Borrowers with a credit score as low as 580 may be eligible for an FHA loan with a 3.5% down payment, while borrowers with a credit score between 500-579 may still be eligible with a 10% down payment. This down payment can come as a “gift” from approved sources.
Another advantage of an FHA loan is that it has more flexible debt-to-income ratio requirements. This means that borrowers with higher levels of debt compared to their income may still be eligible for an FHA loan.
Overall, an FHA loan can be a great option for borrowers who don't have a large down payment or a high credit score, but still want to become homeowners. However, it's important to keep in mind that FHA loans also come with certain fees and insurance requirements that can make them more expensive than conventional loans in the long run.