The Federal Housing Administration does not lend money. It insures loans made by approved lenders, and that insurance lets those lenders say yes to borrowers a conventional loan would turn away. That is why FHA loans are known for forgiving credit standards and low down payments.
We have placed FHA loans for Iowa families since 2005. As a broker, we shop your FHA loan across multiple lenders instead of offering one rate from one bank, and that matters more with FHA than almost any other loan. FHA sets the minimum rules, but each lender adds its own. One lender may stop at a 640 score while another goes down to 580. Knowing which is which is our job.
How an FHA loan works
With a credit score of 580 or higher, you can typically buy with as little as 3.5% down. Scores between 500 and 579 may still qualify with a 10% down payment. In some cases, borrowers with a 580 score can even reach 100% financing when FHA is paired with down payment assistance such as the IMS Homebuyer Grant.
Every FHA loan carries mortgage insurance in two parts. There is an upfront premium of 1.75% of the loan amount, which is usually rolled into the loan so you do not pay it in cash, and an annual premium that is divided into your monthly payment. In return you get a lower down payment, more flexible debt-to-income limits and easier approval after credit setbacks.
FHA compared with a conventional loan
Neither loan is always better. The right answer depends on your credit score, your down payment and how long you plan to keep the loan.
| Feature | FHA loan | Conventional loan |
|---|---|---|
| Minimum down payment | 3.5% with a 580 score | 3% for some buyers, more for others |
| Credit flexibility | Scores from 500 considered | Usually 620 or higher |
| Mortgage insurance | Upfront and annual premium | Monthly PMI under 20% down, removable later |
| Seller help with closing costs | Up to 6% of the price | 3% to 9% depending on down payment |
| After bankruptcy | 2 years after Chapter 7 | Typically 4 years after Chapter 7 |
| Best fit | Fair credit or recent setbacks | Strong credit and larger down payment |
Where FHA shines
- Lower credit score thresholds than most conventional loans
- Down payment gifts from family, employers and some nonprofits
- Seller concessions of up to 6% that can cover much of your closing costs
- Fixed rates that are often competitive with conventional pricing
- Assumable by a qualified future buyer, which can be a selling point if rates rise
- Two to four unit homes with the same low down payment, as long as you live in one unit
FHA after bankruptcy or foreclosure
Past financial trouble does not close the door. FHA guidelines spell out how long you need to wait, and they are shorter than most people expect. Documented extenuating circumstances, such as a serious illness or the death of a wage earner, can shorten them further.
| Feature | Typical FHA waiting period |
|---|---|
| Chapter 7 bankruptcy | 2 years from discharge |
| Chapter 13 bankruptcy | 12 months of on-time plan payments, with court approval |
| Foreclosure | 3 years from completion |
| Short sale or deed in lieu | Generally 3 years |
Homes that qualify
FHA requires an appraisal that confirms the home is safe, sound and secure, which protects you as much as the lender. The home must be your primary residence. Single-family houses, townhomes, condos in approved projects and two to four unit buildings all qualify. FHA also sets a maximum loan amount for each county, and the standard limit covers the large majority of homes for sale in Linn County and across Iowa.
FHA loan requirements
- Credit score of 580 or higher for 3.5% down, or 500 to 579 with 10% down
- Steady income and generally two years of work history, with flexibility for students and career changes
- Debt-to-income ratio within program limits, with room for compensating factors
- The home will be your primary residence
- Property passes an FHA appraisal
- Required waiting period met after any bankruptcy or foreclosure
Lenders may apply standards above FHA's minimums. We compare several to find the most flexible fit for you.
