What is a FHA Loan for a House?

Easy to understand guidelines for home buyers and homeowners.

FHA mortgage graphicIf you’re thinking of purchasing a home, one of the most important decisions you’ll make is whether to use a conventional loan or an FHA loan. An FHA home loan is designed for borrowers with low credit scores and moderate to high incomes. Here’s what you need to know about this type of mortgage:

What Is An FHA Loan?

An FHA home loan is a type of mortgage that is offered by the Federal Housing Administration (FHA). This agency was created in 1934 and is a part of the U.S. Department of Housing and Urban Development (HUD).

The FHA offers mortgages to borrowers who meet certain qualification requirements. The minimum requirements for an FHA loan are that you have a good credit history, you can afford the loan, and you have a stable employment or business situation. Borrowers who have had a foreclosure in the past may also be eligible for an FHA loan.

FHA loans have some unique features that make them desirable to borrowers. These loans have lower interest rates and require less documentation than other types of mortgages. In addition, these loans are available in a variety of financing options, including fixed-rate mortgages, adjustable-rate mortgages, and home equity loans.
An FHA mortgage does not need that you be a first-time buyer of a property in order to qualify.

If you are interested in applying for an FHA loan, be sure to speak to a lender listed below.

Eligible Property Types for an FHA Loan

FHA financing is available for many different kinds of properties. This loan is available for a variety of property types, including:

  • manufactured (mobile homes),
  • approved condos,
  • single-family homes, and
  • multifamily homes with up to four units.

Only homes that you intend to live in as your primary residence may be purchased using an FHA loan. You should seek a conventional loan if you want to buy a second house or an investment property.

What are the FHA Loan Requirements

The Federal Housing Administration (FHA) is a government-sponsored housing finance agency. It's mission is to help make homes available to people who need them, by providing affordable financing for home purchases and refinancing. FHA loans are considered a "low down payment" option, meaning that you don't need as much money down as with other types of loans.

To be eligible for an FHA loan, you must meet certain requirements.

Eligible borrowers include:

  • U.S. citizen
  • Permanent resident aliens
  • Non-Permanent resident aliens
  • DACA - qualified undocumented immigrants who came to the United States as children

An FHA loan is a good option if you're looking for a low-cost loan that has some flexibility in terms of the property you can buy. Read more

What are the FHA Loan Down Payment Requirements

Here are the FHA loan down payment requirements:

The minimum down payment requirement for a FHA loan is 3.5%, although the 203h disaster program waives the down payment with the 203h program.

What is the FHA Mortgage Insurance

When you get a mortgage, there are typically two types of insurance you must pay. There is an initial fee that is paid at settlement in cash, financed into the FHA loan, or paid as a seller concession. The upfront cost is 1.75% of the loan amount.

You also have to pay an annual premium of 0.85% of your loan balance, which is divided into 12 monthly payments. The monthly percentage may be less with a larger down payment and/or shorter term. 

The main purpose of FHA mortgage insurance is to protect the lender in case you can’t make your payments and default on your loan. It also helps people who may not be able to afford a traditional down payment buy a home. Read more

What is the Minimum FHA Credit Score Requirement

The Federal Housing Administration does not provide mortgage financing directly to the borrower, rather, the FHA works through approved FHA lenders. The Federal Housing Administration (FHA) prefers a credit score of 580 or higher for customers seeking an FHA loan; nevertheless, the FHA allows lenders to offer FHA loans to borrowers with a credit score as low as 500. The borrower is required to submit a down payment of ten percent.

What are the FHA Loan Limits

FHA loan limits graphicThe Federal Housing Administration sets the lending limits annually. The maximum FHA loan amount is determined by the county in which the property is located and is equal to 115 percent of the area's median home price.

The FHA uses data provided by the Federal Housing Finance Agency (FHFA).

The maximum loan amounts are:

1 - unit -  $420,680
2 - units - $538,650
3 - units - $651,050
4 - units - $809,150

Read more

What are the FHA Income Requirements

FHA does not specify a minimum amount of time that a borrower must have held a job in order to be qualified for a mortgage. The lender, however, is required to confirm the borrower's employment for the most recent two full years.

The borrower is required to explain any gaps in work that last more than a month.

Borrowers with gaps in employment that span one or more months must provide evidence to support the employment gap with college transcripts, military discharge papers or medical documentation during the most recent two  full years.

If the lender can provide documentation, allowances may be given for seasonal work, which is common in the construction industry and in agriculture.

There are no upper nor lower income restrictions for FHA loans that must be met in order to qualify for an FHA loan.

Wage earners must provide their most recent pay stubs covering the last 30 days, as well as their W2s and tax returns from the previous two years.

Self-Employed Borrowers: You must provide your tax returns for the previous two years, as well as maybe a P&L statement for the current fiscal year. Borrower Employment and Employment Related Income

What is the FHA Debt to Income Requirement

In order to qualify for an FHA loan, you must satisfy certain income standards. To qualify for an FHA loan, your monthly housing expenditures (principal and interest on the mortgage, homeowner's insurance, and property taxes) cannot exceed 31% of your total monthly income.

Your total debt obligations (including your mortgage, credit cards, student loans, and car loans) must not exceed 43% of your gross monthly income.

A DTI of 43 percent is permissible according to the normal FHA guidelines; however, much higher ratios, up to 56.9 percent, are allowed with compensating factors. Read more

FHA Gift Funds Explanation

Gift funds graphicThe FHA allows gifted money from family members and other donors to partially or totally pay the down payment and closing costs. There cannot be a repayment arrangement between the donor (person giving the money) and the borrower. Eligible donors include:

  • the borrower’s relative
  • the employer or labor union of the borrower
  • a public entity or governmental agency that has a program providing home ownership assistance to first-time homebuyers or low and moderate-income families
  • a public or governmental organization with a program for housing
  • a close friend who has a well-defined, verifiable stake in the borrower
  • a charitable organization

The borrower must provide evidence of the transfer of gift monies. A gift letter must be signed by both the donor and the recipient. The gift letter has to display the:

  • donor’s name, 
  • address, 
  • telephone number and
  • define the gift's monetary value, and

    specify the nature of the connection between the donor and the borrower, and that repayment is not necessary.

Lenders typically provide the borrower with a pre-printed gift letter to help withe monetary transfer. Read more


FHA Seller Concession Explanation

FHA loans can be obtained by homebuyers with a down payment as low as 3.5% of the purchase price. In order to make this type of loan available to as many people as possible, the Federal Housing Administration (FHA) allows sellers to contribute up to 6% of the sales price towards the buyer's closing costs and prepaid expenses. This is known as a seller concession and can be a great way to reduce your out-of-pocket expenses when buying a home.

There are a few things you should know about seller concessions before you ask the seller to contribute money towards your purchase. First, the concession cannot exceed 6% of the sale price. Second, any money given by the seller must be applied towards closing costs and prepaid items such as escrow or title insurance. Read more

FHA Loan with Cosigner

Cosigner graphicA FHA loan with a cosigner is a popular option for those looking to buy a home. With this type of loan, the primary borrower (the person who is taking out the loan) and a cosigner share the responsibility of ensuring that the loan is repaid.

The cosigner is typically someone who has a good credit history and meets certain other criteria, such as being able to afford the mortgage payment and having sufficient income to cover other costs associated with homeownership, such as property taxes and insurance.

If something were to happen to the primary borrower, such as if he or she lost their job or was unable to make the mortgage payment, the cosigner would be responsible for covering that debt.

The benefits of using a cosigner on a FHA loan include:

-Having someone else share some of the risk associated with owning a home can be beneficial in several ways. First, it can make financing more affordable for those who might not be able to qualify for a traditional mortgage on their own. Second, it can provide peace of mind for those who are nervous about taking on such a big financial commitment. And finally, it can help protect the property value of the home should something go wrong. Read more

What is the FHA 203b Home Loan Program

The FHA home loan program is a government-backed mortgage program that was created in 1934. The FHA 203b home loan program is the primary mortgage offered by the FHA. When someone tells you they purchased a home with an FHA mortgage, chances are, the loan was the 203b loan.

The information provided so far was based on the guidelines for a 203b home loan. Read more

What is the FHA 203k Home Loan Program

The FHA 203k loan incorporates fix up money in addition to the loan to purchase a home.

There are two renovation loans, the Limited and the Standard 203k loan. The eligible borrowers can obtain up to $35,000 fix up money with the Limited 203k loan. This is a great opportunity for home buyers who need repair or modernization on their new home.

The Standard 203k loan program also wraps the renovation money into the loan. The difference between the limited programs and the standard programs is that the Standard is more robust. The improvements require more that $35,000. A consultant is used to supervise the renovation.

The 203k loan can also be used by existing homeowners who want to improve their home. Both the Limited and Standard 203k are available for a refinance loan. Read more

What is the FHA 203h Home Loan Program

Borrowers and lenders frequently ignore the 203h loan program because of its perceived complexity. Victims of natural disasters are the focus of this lending program. Homebuyers as well as homeowners who have suffered damage to their properties as a result of natural disasters are eligible to participate in the program.

The 203h loan program is comparable to the 203k loan program; however, the 203h loan does not require a down payment. Read more

FHA Refinance Programs

Believe it or not, the FHA offers 5 refinance options:

Mortgage refinancing of an existing FHA-insured loan is referred to as a "streamline refinance." This type of refinancing involves only a minimal amount of credit verification and underwriting.

Streamline Refinance Credit Qualifying
Streamline Refinance non Credit Qualifying

Rate and Term Refinance
Simple Refinance With Appraisal
Cash out refinance

Conventional Loan vs. FHA Loan

FHA versus conventional loan graphicA conventional loan is a loan that is not backed up by the federal government, at least not officially. Conventional loans are offered by lenders who provide the mortgage money on behalf of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Corporation (Freddie Mac). Fannie and Freddie have similar lending guidelines and mortgage programs.

The benefit of the conventional loan is that there is no private mortgage insurance with a 20% down payment. Home buyers and homeowners who refinance with a conventional loan are required to pay mortgage insurance with a down payment less than 20%. By federal law, the mortgage insurance will drop off when the loan balance reaches either 78% or 80% of the property value. There are rules that define the PMI removal.

The FHA also requires their version of mortgage insurance, however, the requirements are such that the mortgage insurance will stay with the mortgage payment until the loan is paid off or refinanced.

Most home buyers use the FHA loan to help them to easily purchase a home and refinance to a conventional loan after they established sufficient equity.

Fannie Mae offers two 3% down payment programs to compete with the FHA.

The Conventional 97 is aimed at first time home buyers.
The HomeReady program targets low to moderate home buyers.

The interest rates on the Conventional loans tend to be higher than with FHA financing because there is no federal backing.
Read more at ConventionalLoanPlus.com

FHA Loan vs. USDA Loan

The USDA home loan program is available to rural and qualifying suburban areas.

The USDA loan does not require a down payment. That's right. The USDA loan is 100% financing. 
Now you're probably thinking “what's the catch”. Here it comes. There are income limits and the property must be located in a USDA eligible area.

The USDA provides a lookup tool for both income and area.

A willing home seller can pay up to 6% of the closing and prepaid costs. The USDA guidelines tend to follow the FHA underwriting guidelines.

The USDA offers two purchase programs and a refinance option. 

There is a Guarantee Fee of 1% of the loan amount that is paid in cash at settlement or financed, or paid by the home seller with a sales concession. The USDA also requires a monthly fee like the FHA program. The upfront fee and monthly fee are lower than the FHA funding fees.

Read more at USDALoanPlus.com

FHA Loan vs. VA Loan

The Veterans Affairs mortgage doesn't need a down payment at all. There are costs due up front, unless the borrower is receiving a disability benefit of at least 10%, or is a recipient of the Purple Heart.

The upfront fee is determined by a number of factors, including the down payment percentage and whether or not the veteran has utilized a VA mortgage in the past. There are no PMI or MIP costs that need to be paid each month.

Unlike the FHA loan, the seller is permitted to pay all of the Veteran's closing expenses, and maybe even the prepaid fees as well.

Gift funds is limited to eligible Veteran donors. The FHA is superior to the VA when it comes to gift funds.

The interest rates are similar to the FHA interest rates, which are lower that the conventional programs.

Read more at VAloanPlus.com

Rotating question markFrequently Asked Questions

Q. Can you get an FHA loan on a mobile home?
A. Yes, you can get an FHA loan on a mobile home. The mobile home must be permanently attached to the land, and the loan amount cannot exceed the value of the home. Read more

Q. Can you have 2 FHA loans?
A. The short answer is yes. But, it's not that simple. Read more

Q. Does FHA loan have PMI?
A. The FHA does not have private mortgage insurance, but it does have mortgage insurance premiums. These premiums are paid by the borrower and are in addition to the principal and interest payments on the loan.

Q. How do you get an FHA loan?
A. At the bottom of this page is a listing of FHA lenders to choose from.

Q. How long to close FHA loan after an appraisal.
A. The time it takes to close an FHA loan after appraisal varies depending on the lender, but it typically takes around two weeks. During this time, the lender will verify the information in the appraisal and make sure that everything is in order before funding the loan.

Read more questions and answers about FHA loans

Conclusion

To qualify for an FHA loan, you must meet certain requirements, including a minimum credit score and down payment amount. You may also be required to pay mortgage insurance premiums. The FHA loan program is with out question the best loan program for cash strapped home buyers and credit challenged buyers.