Understanding FHA Loans: A Comprehensive Overview for 2024

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FHA home loans are one of the most popular types of mortgages in the United States. With low down payments and lenient credit requirements, they’re often a good choice for first-time homebuyers and others with modest financial resources.

FHA mortgage guidelines allow down payments of as little as 3.5% and have less strict credit requirements than conventional mortgages, putting these government home loans within reach of borrowers with short credit histories or flawed credit.

You can use an FHA mortgage to buy a home, refinance an existing mortgage or get funds for repairs or improvements as part of your home purchase loan. If you already have an FHA home loan, there’s a streamline refinance option that speeds qualifying and makes it easier to get approved.

Below, we cover all aspects of this government-backed mortgage option to help you navigate your homebuying journey.

What is the FHA?

The FHA (Federal Housing Administration) is a federal agency under the U.S. Department of Housing and Urban Development (HUD). It does not make loans but guarantees home loans that meet the FHA’s requirements.

Established in 1934, the FHA plays a critical role in financing for first-time homebuyers, minority borrowers, borrowers with flawed credit history, persons with modest incomes and those who have little money to put down on a home.

The FHA is self-financed, designed to perform entirely by generating its own income at no cost to the taxpayer. Financing comes from FHA mortgage insurance premiums (MIPs) – a required fee for FHA loan users. The FHA hasn’t received taxpayer funding since it was founded in 1934, including in the aftermath of the 2008 economic crash.

FHA Loan Statistics Snapshot

  • From 2010 to Q3 2023, the FHA guaranteed 15,583,478 loans.
  • The average loan amount in 2023 is currently $287,951
  • In 2022, the FHA guaranteed 854,877 FHA loans. 2023 is pacing to be far less, currently at 487,212.
  • Over 1,400 lenders made an FHA loan in 2022, compared to 1,313 in 2023.

FHA Loan Advantages

There are a lot of reasons why FHA home loans are so popular. Among the main ones are:

  • The down payment for FHA loans can be as little as 3.5%, putting them in reach of borrowers with limited financial resources.
  • FHA credit requirements are fairly lenient. Many FHA mortgage lenders allow FICO credit scores as low as 580; some may go even lower with a minimum of 10% down.
  • An FHA 203(k) loan allows you to borrow money for home improvements as part of the same loan used to purchase or refinance your home. The amount you can borrow is based on the home’s value after improvements, so the total loan amount can exceed the property’s current value.
  • FHA refinance guidelines require less home equity and allow lower credit scores than on a conventional refinance. Plus, there’s an “FHA Streamline Refinance” option for current FHA borrowers that makes refinancing even simpler.

FHA Loan Disadvantages

FHA loans aren’t the perfect mortgage for everyone. Certain limitations and conditions may affect whether they’ll be the right choice for you.

  • For starters, there are limits on how much you can borrow with an FHA mortgage. FHA county loan limits for single-family homes range from $498,257 in most of the country to as much as $1,149,825 in counties with high real-estate values.
  • The FHA requires mortgage insurance on all FHA loans. There’s an upfront premium of 1.75% plus an annual premium paid as part of your monthly mortgage payments. FHA mortgage insurance can make FHA loans more costly if you don’t intend to refinance later, particularly if you have good credit.
  • If you put less than 10% down, you must carry FHA mortgage insurance for the life of the loan. Conversely, conventional mortgages allow you to cancel mortgage insurance once you reach 20% equity.
  • FHA home loans have stricter property eligibility requirements. Homes must pass an inspection to ensure no structural problems or hazards.
  • FHA mortgage guidelines generally do not allow them to be used to buy a second home or investment property. Borrowers can only use FHA loans as their primary residence.

FHA mortgage guidelines

FHA home loans are easier to qualify for than conventional mortgages backed by Fannie Mae or Freddie Mac (which back most U.S. mortgages). But as with any mortgage, your ability to qualify depends on your credit, down payment, debt-to-income ratio and the appraisal of the financed property.

It’s important to remember that while the FHA sets minimum standards for the mortgages it will insure, individual FHA loan lenders may impose stricter standards.

Below is an overview of key FHA loan requirements:

Credit Score Requirements

Officially, FHA mortgage requirements allow you to qualify with a FICO credit score as low as 500. While some lenders go that low, many will not. Additionally, those with a FICO between 500 and 580 require a minimum of 10% down.

FHA loan credit score requirements typically vary by lender. Some lenders require a 620 minimum; others will go down to the 580 mark.

FHA Loan Down Payment Requirements

FHA loans are an attractive option for homebuyers, offering the possibility of purchasing a home with a down payment as low as 3.5%. However, it’s important to note that a higher down payment may be necessary or beneficial in certain cases.

For example, individuals with credit scores below 580 require 10% down. Additionally, a larger down payment can also lead to savings in the long run. Opting to put down 5% or more on a 30-year FHA loan or 10% or more on a 15-year loan can result in lower annual FHA mortgage insurance premiums.

FHA Loan Debt-to-Income Requirements

FHA mortgage guidelines are slightly more generous than conventional mortgages regarding income requirements. Officially, the maximum FHA debt-to-income ratio is 31/43.

That means that your monthly mortgage payment (including taxes and insurance) should be no more than 31% of your gross monthly income and that your total monthly debt payments – your mortgage plus credit cards, auto loans, student loans and the like – should not exceed 43% of your gross monthly income.

These are not hard-and-fast limits. FHA mortgage lenders may go higher for borrowers with good credit, larger down payments, significant cash reserves or other positive factors.

FHA Loan Appraisal Requirements

The FHA property appraisal is similar to a conventional mortgage. The property must appraise for a high enough value to support the loan; that is, if you’re paying $400,000 to buy the home, the appraiser must determine that it’s worth at least that much.

The FHA requires an appraisal for home purchases, standard refinances and reverse mortgages. However, an appraisal is typically not required on an FHA streamlined refinance, which is one of the advantages of that type of loan.

Remember, an appraisal is not the same as a property inspection. An appraisal determines the property’s value; the inspection is a thorough review of the property for any issues or needed repairs.

How to apply for an FHA loan

The FHA doesn’t issue mortgages itself but guarantees or insures the loans. The FHA essentially acts as a buffer for lenders by reducing their risk if a loan defaults. To apply for an FHA loan, contact a private lender or bank that does FHA loans.

Types of FHA loans

The FHA offers a variety of loan options to meet various needs, including purchasing, refinancing, home improvement, and even tapping home equity to obtain funds for various purposes.

Basic Home Mortgage Loan 203(b)

The traditional FHA loan is the most common FHA loan type. It’s intended for homebuyers who are purchasing or refinancing a primary residence.

FHA 203(k) Rehabilitation Mortgage

The FHA 203(k) loan combines the purchase of a home and the cost of its rehabilitation through a single mortgage. The 203(k) is ideal for buying homes that need repairs or renovations. The amount borrowed includes the home’s price and the cost of the renovations.

Home Equity Conversion Mortgage (HECM)

The HECM is an FHA reverse mortgage program for homeowners aged 62 and older. The FHA’s reverse mortgage product allows seniors to convert the equity in their home into cash while still living in and owning their home.

FHA Energy Efficient Mortgage (EEM)

The FHA’s EEM program helps homeowners save money on utility bills by enabling them to finance the cost of adding energy-efficiency features to new or existing housing as part of their FHA-insured home purchase or refinancing mortgage.

Section 245(a) Loan

The FHA 245(a) is a Graduated Payment Mortgage (GPM) or Growing Equity Mortgage (GEM) program. This program is designed for borrowers who expect their income to increase and offers low initial monthly payments that gradually increase over time.

FHA Streamline Refinance

The FHA streamline is a simplified refinance program for homeowners with existing FHA mortgages. The process is streamlined, requiring less documentation and no appraisal in most cases. FHA streamlines must lower the interest rate or provide a tangible benefit to the consumer.

FHA Cash Out Refinance

The FHA cash-out refinance option allows homeowners to refinance their mortgage for more than they owe and receive the excess amount in cash. This type of loan requires homeowners to have at least 20% equity in their home and typically demands a minimum credit score of around 580. It’s commonly used for large expenses or debt consolidation, but it involves paying both upfront and annual mortgage insurance premiums.

FHA Loans for Manufactured Homes

The FHA also provides loans for the purchase of manufactured homes or lots. These loans can be used for single and multi-section manufactured homes on owned or leased land.

FHA Loans for Condos

Borrowers can also purchase a condo with an FHA loan. To qualify, the condo must be in an FHA-approved project, meet the FHA’s property requirements, and the condo complex can’t have more than 50% of the owners’ financing with an FHA loan, among other criteria.

FHA mortgage insurance

All FHA loans require FHA mortgage insurance. A home purchase or refinance comes in two parts: an upfront mortgage insurance premium (MIP) paid at closing and an annual premium included in your monthly mortgage payments.

The FHA upfront MIP is 1.75 percent of the loan amount and can be rolled into the loan amount. Annual FHA mortgage insurance rates vary according to your down payment, length and size of the loan.

The typical FHA borrower who puts 3.5 percent down on a 30-year mortgage will pay an annual mortgage insurance premium of 0.55 percent of the loan balance. But annual premiums can vary from as little as 0.40 percent on a 15-year loan to 0.75 percent on a jumbo loan exceeding $1,149,825.

If you put less than 10 percent down, you must carry FHA mortgage insurance for the life of the loan. But you can avoid that by refinancing to a conventional mortgage once you reach 20 percent equity.

See the link below for more details, including FHA mortgage insurance rates and premiums for FHA Title 1 loans and Reverse Mortgages.

More information: FHA mortgage insurance explained

FHA loan limits by county

There is a limit to how much you can borrow with a FHA loan to purchase or refinance a home. In most of the country, the FHA lending limits are $498,257 for a single-family home. However, that can go as high as $1,149,825 in counties with high real estate values.

Higher limits apply for 2- to 4-unit homes, as high as $1.2 million for a 4-unit home in a high-priced area. Note that FHA loans for multiunit homes require that one unit is your primary residence.

For a full list of FHA loan limits by county, visit the FHA Mortgage Limits page on the HUD website.

Final Thoughts

FHA loans stand out as a vital home financing tool – particularly for first-time homebuyers and those with less-than-perfect credit histories. These loans, backed by the Federal Housing Administration, offer unique advantages such as lower down payments, more lenient credit requirements, and competitive interest rates. While they come with certain requirements and limitations – like mandatory mortgage insurance and specific property standards – the benefits they provide in making homeownership accessible cannot be overstated.

For many Americans, an FHA loan is the gateway to achieving the dream of owning a home, offering a pathway that might otherwise be out of reach. Whether you’re a first-time buyer or someone looking to refinance, an FHA loan offers a promising option worth considering. As with any significant financial decision, potential borrowers should conduct thorough research and consult with financial advisors and mortgage professionals to understand fully the terms and implications of an FHA loan.

By opening doors to homeownership, FHA loans continue to play a crucial role in helping individuals and families build a foundation for a stable, secure, and prosperous future.

Kirk Haverkamp

Kirk Haverkamp is an award-winning reporter and editor with more than 25 years of experience in journalism and public relations. He has contributed to Credit.com, Investopedia, and MetroMode online magazines, among other work. He has a B.A. in English from Hope College and a Master’s Degree in journalism from Michigan State University.

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