Understanding FHA Home Loans
Loans from the Federal Housing Administration, also known as FHA loans, help more than one million homebuyers to purchase affordable single-family homes each year. As a program of the U.S. Department of Housing and Urban Development (HUD), the FHA is currently the world’s largest insurer of home mortgages. Since 1934, the FHA home loan has been known for its affordable rates, closing cost assistance and low down payment options. This helps make homeownership a reality for many first-time home buyers.
Several different types of FHA loans are available to borrowers who meet the income and credit requirements. These include loans for seniors, manufactured homes, and even making energy improvements on your home. Typically, borrowers must meet different eligibility requirements depending on the type of loan they wish to obtain. To explore the different types of FHA loans and to learn how to apply, review the information below.
What are FHA loans?
An FHA home loan is a mortgage that is insured by the government. Through this option, homebuyers who meet income and credit requirements can qualify for a loan more easily. These loans also cover their closing costs and allow them to make a down payment as low as 3.5 percent of the home’s purchase price. When borrowers make their monthly mortgage payments, however, they must also make payments toward their mortgage insurance.
While these loans are excellent options for first-time homebuyers who do not qualify for a conventional loan, there are plenty of options for current homeowners as well. These include the:
- HECM loan. Also known as the Home Equity Conversion Mortgage or “Reverse Mortgage” loan, this program is available to seniors who are at least 62 years of age. Seniors who already paid their mortgage in full may choose to supplement their income by withdrawing funds from their home’s equity.
- Limited 203k loan. Also known as the Limited FHA 203 (k) mortgage program, or Rehabilitation Mortgage Insurance, this type of financing gives homebuyers and homeowners the opportunity to make improvements and repairs to their home even if they do not have the cash or savings to do so. Through this program, applicants can borrow as much as $35,000 to repair, upgrade or improve their home.
- Section 203k rehab loan. As another type of home improvement loan, this FHA program gives homeowners the opportunity to finance the rehabilitation of their current home, or it gives homebuyers the chance to finance the purchase and rehabilitation of a new home. However, the home must have been built at least one year prior, and the cost of rehabilitation it must be $5,000 or more.
- FHA Title 1 loan. This type of financing is also known as the Title I Property Improvement Loan. Typically, homeowners can use a 203(k) loan in conjunction with this type of financing if they wish to improve the livability of their existing home.
- FHA disaster relief loans. After a disaster occurs, homeowners may qualify for a special type of FHA mortgage insurance if their home was destroyed or damaged. Qualifying beneficiaries can use this type of loan to reconstruct their existing property or purchase a new single-family home without making a down payment.
Note: While FHA interest rates are typically lower than those for most conventional mortgages, borrowers may end up paying more over time due to the private mortgage insurance (PMI). To remove the PMI from their mortgage, borrowers may choose to refinance their home once they build their credit and qualify for a conventional mortgage.
What are the FHA loan limits?
Typically, FHA limits are based on the local cost of living. This means that they vary by state, county and metropolitan area, as well as the size of the borrower’s household. To get an idea of what the maximum limits might look like in their area of residence, borrowers can use the HUD’s online mortgage limit calculator. When calculating their FHA maximum loan amount, applicants must provide the following information:
- The name of their state and county.
- The loan type.
- The limit year.
For instance, if applying for an FHA Forward Loan in Greenwood, SC, basic limits range between $314,827 for a one-family household, and $605,525 for a family of four. In comparison, 2019 limits for Fannie/Freddie loans in the same location range between $484,350 for a family of one and $931,600 for a family of four.
What are the FHA down payment requirements?
With an FHA loan, qualifying borrowers can make a down payment of as low as 3.5 percent of their home’s purchase price. As a result, this type of loan is often more attainable for most first-time homebuyers. However, if borrowers can afford to make a higher down payment of between five and 15 percent, a conventional loan may be a better option for them.
How to Qualify for an FHA Loan
FHA loan requirements are generally more flexible than those for conventional loans. This helps home buyers with less cash flow and slightly lower credit scores to afford homeownership. As such, the most important qualifications applicants must meet are outlined as follows:
- Have a credit score of at least 580 and be able to make a down payment of at least 3.5 percent of the home’s purchase price
- Have a credit score of between 500 and 579 and be able to make a down payment of at least 10 percent of the home’s purchase price
Note: Borrowers may need to meet additional FHA guidelines, depending on their lender. In some cases, however, applicants may qualify for a loan even if they do not meet the above credit requirements.
How to Apply for an FHA Home Loan
If applicants qualify for FHA mortgage rates, they can use the HUD’S online search tool to find FHA lenders in their area. Applicants may also speak with an approved housing counselor in their area of residence, or they may contact the HUD directly to obtain advice or application assistance. To find an HUD-approved housing counselor in their area, some smartphone users may also choose to download the free HUD Counselor Locator App.
Note: When comparing FHA loan rates to find the best deal on your financing, the HUD recommends that you obtain a list of current interest rates from each lender and broker.