The Federal Housing Administration (FHA) guarantees loans to help make it easier for first-time home buyers, lower-income buyers or bad-credit buyers to get approved for a mortgage.
FHA loans are the government’s “flagship initiative” to make homeownership affordable.
This guide will explain how FHA loans work, what you need to do to qualify for an FHA loan, and where you can find an FHA lender.
In this guide:
- What is an FHA Loan?
- Pros and Cons of FHA Loans
- FHA Loan Requirements
- Types of FHA Loans
- FHA Financing Limits
What is an FHA Loan?
FHA Loans are not issued by the FHA. Instead, the FHA works with approved lenders to underwrite mortgages. Lenders issue FHA mortgages loans in accordance with federal guidelines, and the FHA insures the loans to reduce the risk to lenders.
FHA loans can be used to buy homes, refinance existing home loans, or to improve a home, and there are many FHA-approved lenders throughout the country.
>> Read More: Best FHA Lenders
Who Does the FHA Serve?
Anyone whose mortgage needs conform to FHA guidelines can choose to get an FHA loan.
However, these loans are usually used by lower-income and moderate-income borrowers who may not have a lot of money for a down payment or who may not have the credit score necessary to qualify for a conventional loan.
With an FHA mortgage, you can buy a home for as little as 3.5% down, whereas most lenders offering conventional loans want 10% to 20% down. This makes it much easier to get into homes in expensive markets where you may not be able to save enough to put down on a home.
>> Read More: Best Mortgage Lenders for First-Time Buyers
Pros and Cons of FHA Loans
There are some significant advantages and downsides to FHA Loans.
- Low down payment requirements: As mentioned above, you only need to put down 3.5% of the home’s purchase price to qualify for an FHA loan.
- Easier qualifying requirements: You can get an FHA loan more easily than conventional loans, especially if you have a lower credit score than conventional lenders require.
- Looser requirements for a down payment: The FHA allows 100% of the down payment to come from gifts or grants, but most lenders limit the amount of down payment funds that can come from gifts.
- Interest rates may be lower: Since the FHA insures your mortgage, you may be able to get a better rate on your FHA loan than you could on a conventional mortgage.
- Sellers can help more with closing costs: Many conventional lenders strictly limit the amount of money sellers can contribute to closing costs, while the FHA allows sellers to pay these costs up to 6% of the price of the home.
- FHA Loan limits: Some regions have relatively low limits on the maximum loan amount you can borrow through the FHA. You can find out current loan limits, which vary by county, on the HUD website.
- Insurance requirements: You must pay for FHA mortgage insurance both upfront and annually. Up-front costs equal 1.75% of the amount you borrow. Annual mortgage insurance premiums depend on your loan-to-value ratio—but these are actually paid monthly and added to your mortgage payment. With a conventional mortgage, you have to pay for private mortgage insurance if you put less than 20% down, but costs are usually lower.
- You may have to carry PMI for the life of the loan. If you put less than 10% down, you will have to pay for private mortgage insurance the whole time you carry the loan. With a conventional mortgage, you can drop PMI after your loan-to-value ratio hits 80%.
>> Read More: First-Time Homebuyer Programs
FHA Loan Requirements
Here are some of the key requirements you need to meet to qualify for an FHA Loan:
- Minimum down payment: 3.5% or more depending on your FICO credit score.
- Minimum credit score: 500 with 10% down payment or 580 with 3.5% down payment.
- Mortgage insurance: 1.75% upfront premium plus annual premiums that vary depending on your loan-to-value ratio (LTV). Annual premiums are paid on a monthly basis.
- Home purpose: The home must be your primary residence
- Employment status: You must provide proof of employment
- Maximum debt-to-income ratio: 43%
Types of FHA Loans
There several different loan programs offered through the FHA, and each loan type is tailored to different kinds of borrowers.
This is a standard mortgage that allows you to purchase a primary residence and pay your loan off over time. It can have a fixed or variable rate.
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Home Equity Conversion Mortgage
This type of mortgage is available to homeowners aged 62 and over who want to take cash out of their home to help fund retirement or other expenses. It is a type of reverse mortgage. You can borrow money in a fixed monthly amount or open a line of credit to access cash as needed.
>> Read More: Best Reverse Mortgage Lenders
203(k) Improvement Loan
This type of FHA home loan provides you with funding not just for buying a house, but also for making your home more efficient and lowering your utility bills.
Energy Efficient Mortgage Loan Program
Like the 203(k) loan, a loan made available through the Energy Efficient Mortgage Loan program can also provide you with extra funds to make your home greener and your utility bills lower.
Section 245(a) Loan
This is a specific type of mortgage loan where you make smaller monthly payments to start and payments go up as your income grows. In some cases, higher monthly payments are made on a set schedule to reduce the repayment term of your FHA Loan.
FHA Financing Limits
The amount that you are allowed to borrow will vary depending upon the area where you live and the cost of housing in that area. The table below shows some examples of how much you may be able to borrow in different parts of the country if you obtain an FHA Loan.
|Type of Property||Max Loan in Low-Cost Area||Max Loan in High-Cost Area||Max Loan in Special-Exemption Areas|
Special exemption areas include Alaska, Hawaii, Guam, and the U.S. Virgin Islands
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