What Is An FHA Loan?

An FHA loan is a type of mortgage that is insured by the Federal Housing Administration (a department of HUD) that you can apply for for at local banks and/or credit unions and use towards buying a new home, fixing up a house you already own, or a combination of the two.  FHA loans can be used to buy or refinance single-family homes, two- to four-unit multi-family homes like duplexes, fourplexes, condos, townhouses, and certain manufactured homes.  

Because the government is insuring the loan, it is less risky for lenders to approve an FHA loan making them more accessible than traditional loans.  The government backing also allows lenders to offer lower rates, more down payment options, and the opportunity to approve people with lower credit scores.  

There are also numerous types of FHA loans, and the limits (the total amount you can take) can change.

Types of FHA Loans

203(b) loan

The 203(b) loan is the most common type of FHA loan and you can use the 203(b) to purchase or refinance a home.  The down payments can go as low as 3.5% making them very attractive.  The downside to a 203(b) loan is they cannot be used on a home where the repairs will cost more than $5,000.

203(k) loan

Also know as a 203(k) Rehabilitation mortgages, this FHA loan is used to buy a house that needs substantial repairs.  The 203(k) loan is available if you are buying a new home or to fix up your existing home.  To qualify the costs repair the home must exceed $5,000 and repairs have to be done in six months or less by a qualified professional.

HECM

Home Equity Conversion Mortgages (HECM) are also known as reverse mortgages. This loan is for homeowners over 62 years old so they can to turn their home equity into income.  The benefit of an HECM FHA loan is that you will have income you can use to pay bills, buy groceries or whatever you’d like, the downside is that you will no longer own your home and run the risk of losing it if you outlive the remainder of the reverse mortgage.

Energy Efficient Mortgages (EEM)

Energy Efficient Mortgages are great if you are making home improvements to reduce your energy usage. EEM loans can be applied whether you’re shopping for a new home or looking to upgrade your current one.  To qualify, your home has to be professionally assessed and the improvements need to be cost-effective.  The costs of these green upgrades can be added into your loan without having to increase your down payment.  

245(a) loan

A 245(a) loan (graduated payment mortgage) starts with smaller monthly payments that gradually go up.

The 245(a) loan offers five plans:

• Three plans that have five years of payment increases at 2.5%, 5% and 7.5% annually.
• Two plans with payment increases over 10 years at 2% and 3% annually.

Construction to Permanent Loan

A Construction to Permanent Loan (CP) is more difficult to get than other FHA loans, but unlike other FHA loans the Construction to Permanent Loan can be used to pay for building your new home and to buy the land your house is being built on. 

Title I Property Improvement Loan

The Title I Property Improvement Loan is used to purchase a manufactured home or repair an existing one.  The Title I Property Improvement Loan allows you to borrow up to $25,000 for a single-family property (or $25,090 for mobile homes that include land) and $60,000 for a multifamily home.

Now that you know which type of FHA loan will meet your needs, it’s important to know how much you can actually borrow.

FHA Loan Limits

How much you can borrow with an FHA loan depends on where your potential new home is located.  For example, the FHA loan limit for high-cost areas like California can be $970,800 and as low as $420,680 for lower cost areas like Jefferson County in Alabama.  FHA loan limits are set based on county property values.  If you’re curious about what your county’s FHA loan limits are, click here to use the FHA’s free tool.

Now that you know the type of FHA loan to take and what the limits are, here is what you’ll need to prepare in order to qualify for an FHA loan.

How to qualify for an FHA loan

To qualify for an FHA loan, there are several requirements you’ll need to meet :

• A minimum credit score of at least 500:
  • If your score is under 579, you’ll need a 10% down payment.
  • Gift money is allowed as part of your down payment as long as it is well documented that it is a gift and not a loan.
• Your new mortgage payment plus your monthly bills cannot be more than 50% of your income.
• The property you are buying has to have an appraisal done and meet specific property requirements.
• You’ll need to be able to make mortgage insurance payments:
  • If your down payment is under 10%, you’ll pay for the life of the loan.
  • If your down payment is over 10%, you will only pay for 11 years.

Bonus tip:  Many states and cities offer down payment assistance for first-time home buyers like NeighborWorks Green Bay and the FirstHome.

And now you know what an FHA loan is, the types of FHA loans that are available and how much you can borrow based on where you live.  If you have any questions about FHA loans or are interested in buying a home with an FHA loan, call us at 703.934.2100 and we’ll be happy to answer your questions while also assisting with title insurance and title searches, closing and escrow.