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The federal government created the FHA loan program to improve housing standards, stabilize the mortgage market, and to help make mortgages more affordable and accessible. If you want to purchase a home but aren't sure if you have the means to do so, here's what you need to know in order to qualify for an FHA loan.

When an FHA Loan Makes Sense

An FHA loan is a good option for anyone who may be worried their credit score or funds for a down payment won't be enough for a traditional loan. Borrowers who have low incomes may also want to consider an FHA loan because there may be more flexibility in terms of debt to income ratios compared to traditional mortgages.

Even if you have great credit, an FHA loan may make sense if you can't afford to put much toward your down payment. While some traditional mortgages may require as much as a 20 percent down payment, FHA allows for as little as 3.5 percent for down payment. For first time home buyers, this could work in your favor by allowing you to redirect cash to other housing expenses.

Qualifying for an FHA Loan

To qualify for an FHA loan, you may need a certain credit score as well as a steady employment history, which you can prove through tax returns and pay stubs. A lender will use this to look at what percentage of your pay will go toward housing-related expenses.

As for the property itself, you can only take out a loan if you're the primary occupant. You'll need to have the property appraised by someone who has been approved by the HUD. The appraiser will check to see if the house meets certain standards. If not, the seller needs to agree to the required repairs, or you'll need to take care of them prior to closing.

To find a list of updated requirements, check with the Federal Housing Administration or a mortgage lender, such as KeyBank, that offers FHA loans.

How It Compares

An FHA loan is great because you don't need a large down payment or a perfect credit score; however, you will be required to pay for mortgage insurance. Mortgage Insurance Premiums (MIP) help protect the loan investor against loss in the event that the borrower defaults on their mortgage. You'll have to make multiple payments: one that you pay upfront during closing as well as an annual premium within your periodic mortgage payment. Unlike traditional mortgages, you may not be able to terminate this mortgage insurance, depending on various factors including your down payment.

While this will give you a better understanding of what an FHA loan entails, you'll still want to do your research and calculate the costs before diving head-first into a purchase financed by an FHA loan.

This material is presented for informational purposes only and should not be construed as individual tax or financial advice. KeyBank does not provide legal advice.

By selecting any external link on, you will leave the KeyBank website and jump to an unaffiliated third-party website that may offer a different privacy policy and level of security. The third party is responsible for website content and system availability. KeyBank does not offer, endorse, recommend or guarantee any product or service available on that entity's website.

NOTICE: This is not a commitment to lend or extend credit. Conditions and restrictions may apply. Information and offers are subject to change without notice. All loans are subject to credit and collateral approval. Not all loans or products are available in all states.

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