FHA Loans

FHA loans are mortgages insured by the Federal Housing Administration and provided through private, FHA-approved lenders. People with little savings for a down payment, poor credit history or high debt are more likely to qualify for an FHA loan than they are for a conventional mortgage.

Terry Turner, Financial writer for Annuity.org
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APA Turner, T. (2022, April 19). FHA Loans. Annuity.org. Retrieved May 28, 2022, from https://www.annuity.org/real-estate/buying/mortgages/fha-loans/

MLA Turner, Terry. "FHA Loans." Annuity.org, 19 Apr 2022, https://www.annuity.org/real-estate/buying/mortgages/fha-loans/.

Chicago Turner, Terry. "FHA Loans." Annuity.org. Last modified April 19, 2022. https://www.annuity.org/real-estate/buying/mortgages/fha-loans/.

What Is an FHA Loan?

Federal Housing Authority — or FHA — loans are mortgages insured by the federal government. FHA loans are an attractive mortgage option for first-time home buyers and can make it easier for people with limited savings or lower credit scores to get a home loan.

If you qualify for an FHA loan, you may be able to buy a home with a downpayment as little as 3.5%.

Did You Know?
The Federal Housing Administration (FHA) was created during the Great Depression of the 1930s to encourage banks to provide mortgage loans to potential homebuyers. At the time, banks required home buyers to pay 30% to 50% of a home’s purchase price as a down payment.
Source: Encyclopedia Britannica

Because FHA loans are insured by the federal government, lenders can offer FHA loans with lower down payments and fewer requirements.

Since FHA loans were first offered, home ownership in the United States has risen dramatically — from only about 44% of households in 1934 to a record high of 69.2% in 2004. In the fourth quarter of 2021, an estimated 65.5% of American households owned their own home, according to the U.S. Census Bureau.

Are FHA Loans Difficult to Get?

FHA loans are typically easier to get than a conventional mortgage. They provide advantages to people who might not qualify for a conventional mortgage because of lower income or credit scores, higher monthly debts or little savings for a down payment.

Differences Between FHA Loans and Conventional Mortgages
FHA LOANS
CONVENTIONAL MORTGAGE
Allows credit score as low as 500 for a loan as long as you have a sufficient down payment
Requires credit scores of 620 or higher
Allows down payments as low as 3.5% (with a 580 or higher credit score)
Minimum down payment is typically 5% or higher — though 3% may be possible with higher scores and larger savings amounts
Allows down payments to be a gift from family, employers or charitable groups
Only a portion of your down payment can come from someone else
Requires you have mortgage insurance regardless of your down payment amount
Typically only requires you carry mortgage insurance if your down payment is less than 20%
You cannot cancel mortgage insurance unless you refinance to a conventional mortgage
Mortgage insurance automatically cancels when you accrue 22% equity in your home
Mortgage interest premiums require you to pay an upfront cost of 1.75% of the loan
No upfront cost for mortgage interest premiums

Another option is a Veterans Administration (VA) loan. VA loans are mortgages backed by the federal government that are only available to people in military service or who are a veteran. They typically don’t require a down payment.

If you are buying a house in a rural or in certain suburban areas, you may also want to consider a USDA loan — a loan backed by the U.S. Department of Agriculture.

Who Is Eligible for an FHA Loan?

An FHA loan may be easier to qualify for than a conventional mortgage. But there are several FHA loan requirements you must meet to qualify.

FHA Loan Requirements
  • You must have a steady income and proof of employment.
  • The home you purchase must be your primary residence.
  • You must pay for mortgage insurance for the life of the loan (unless you refinance to a conventional mortgage).
  • Your credit score must be at least 580 for a 3.5% down payment.
  • Your credit score must be at least 500 to 579 for a 10% down payment
  • Your monthly debt payments must be less than 43% of your monthly gross income

In addition, the FHA places eligibility limits on how much you can borrow to purchase a home.

These limits are set based on the type of home you plan to purchase and where it’s located. The limits are higher in places with higher property costs — such as in large metropolitan areas — and are updated each year.

FHA Loan Limits, 2022
TYPE OF HOME
LOW COST AREAS
HIGH COST AREAS
Single
$420,680
$970,800
Duplex
$538,650
$1,243,050
Triplex
$651,050
$1,502,475
Fourplex
$809,150
$1,867,275
Source: Federal Home Loan Administration

FHA loan limits can vary from county to county within a state. The Department of Housing and Urban Development provides an FHA Mortgage Limits tool on its website to help you find the loan limits in the county where you are shopping for a home.

Types of FHA Loans

There are several different types of FHA loans. They serve different purposes and you should compare them to determine if one is best for your situation and home buying goals.

In addition to purchasing a traditional house, FHA loans can be used toward several real estate purchases and costs including repairs to the home you buy or to buying a manufactured home.

8 Types of FHA Loans
Fixed-rate FHA loan
The most common FHA product, the fixed-rate FHA loan offers an interest rate that never changes over the life of the loan. This keeps monthly payments stable for as long as you have mortgage payments.
Adjustable-rate FHA loan
Interest rates can rise and fall over time with adjustable rate FHA loans. They typically offer lower rates for the first few years, then the interest rate adjusts periodically based on prevailing rates in the market.
Condominium FHA loan
Also known as Section 203(b) loans, these FHA loans can be used to purchase condominiums. However, the condo has to meet certain FHA requirements including that the building must have at least two units, be primarily residential and be FHA-approved.
Energy-efficient mortgage
An FHA energy-efficient mortgage can be used to make certain energy-saving home improvements. But they have to meet FHA requirements based on cost of the improvements and be approved as cost-effective through a home energy assessment.
FHA 203(k) loan
The FHA 203(k) loan program is designed for purchasing a home that needs extensive repairs. Part of the loan goes toward the purchase price, with the remainder covering repairs. Repairs must meet an FHA-approved list and cannot not cost more than a total of $5,000.
Graduated payment and graduated equity mortgages
Graduated payment mortgages (GPM) and graduated equity mortgages (GEM) allow you to structure your monthly payments to gradually increase over the term. These are best suited to people who expect their income to rise substantially over time.
HEMC (reverse mortgage)
An FHA home equity conversion mortgage (HEMC) is based on the idea of a reverse mortgage. It is designed to allow eligible seniors to leverage their home equity to supplement their income. The homeowner takes payments on the equity in the house.
Manufactured or mobile home FHA loan
FHA manufactured home loans can be used to purchase a mobile home or other manufactured housing. These loans have much lower maximum limits than for traditional home purchases. But the borrowing limit for the land and lot combined is less than $100,000 for a manufactured home — compared to more than $420,000 to more than $970,000 for a traditional single family home.

In addition to actual loans, you can get FHA loan prequalification. This is relatively simple and can be done over the phone.

Is an FHA Loan Right for You?

FHA loans have several advantages for many home buyers. But they may not be the right choice for you. You should consider the differences between an FHA loan and a conventional mortgage based on your financial situation and home ownership goals.

FHA Loan vs. Conventional Mortgage: What’s Better for You?
FHA Loan
Conventional Mortgage
Young or first time home buyers
Buyers with higher credit scores
Buyers with smaller savings
Buyers who have a 20% down payment
Buyers with modest or fluctuating income
Buyers looking for a rental properties or second homes

If you have a high debt-to-income ratio — more than 43% of your monthly gross income goes to monthly bills — you should look for an FHA loan rather than a conventional mortgage.

If you want a larger house — one more expensive than the FHA loan limits for where you are house hunting — you should opt for a conventional mortgage.

Pros and Cons of an FHA Loan

When considering which kind of mortgage may be best for you, you should also consider the pros and cons of an FHA loan. There may be some qualities that tip the balance in one direction or the other.

FHA Loan Pros and Cons Compared to Conventional Mortgages
PROS
CONS
Can purchase even multi-unit home with low down paymentCan’t use to purchase second home or rental property
Can qualify if you have more debtFHA loan limits reduce your borrowing power
Easier to qualify for several different loan programsMust keep mortgage insurance despite amount of equity you have in your home
No maximum income limit to qualifyHigher mortgage insurance costs
You can qualify with a lower credit scoreMore likely to have a higher-priced mortgage

FHA loans also have more stringent appraisal standards than conventional mortgages — looking more closely for health and safety issues. This can end up being a plus for a buyer by heading off expensive repairs before you buy.

FHA loans are also assumable — meaning that if you sell the home, the new buyer can simply take over the mortgage at the same interest rate. This can be an advantage if you sell when interest rates have gone up.

How to Apply for an FHA Loan

While the Federal Housing Administration insures FHA loans, it does not lend any money. You apply for an FHA loan through a private lender — just like for a conventional mortgage.

Applying for an FHA loan is typically a three-step process — finding a lender, filling out an application and providing basic personal and financial information.

Step 1: Find a Lender

Most banks, credit unions, mortgage companies, online mortgage lenders and other financial institutions dealing with home loans offer FHA mortgages.

You can also apply for a preapproval of an FHA loan. It typically can be completed within a day once the lender has all your information. A preapproval is not a guarantee of a loan, but will give you and the seller an idea of how much you can afford to pay for a home.

Even though you can find FHA loans with a credit score as low as 500 to 580, not all lenders accept lower credit scores. Make sure you find one that does if you have a low score.

Step 2: Complete Your FHA Loan Application

You should apply to three to five lenders so you can compare rates, terms and fees before settling on the best FHA loan. You can apply in person at brick and mortar banks or mortgage companies, but many lenders will let you apply online.

Information You’ll Need to Provide for an FHA Loan Application
  • Your Name & Social Security Number
  • Drivers License or Other State ID
  • Income Information & Employment History
  • Property’s Address & Purchase Price
  • Down Payment Amount

Step 3: Compare Loan Offers

After applying for an FHA loan, you should receive a loan estimate — a standard form all lenders use — within three business days. It will show you the estimated monthly mortgage payment, interest rate and closing costs.

The loan estimate will allow you to compare terms, rates and fees side-by-side. Just make sure the loans are for the same type, amount and term.

Once you decide on the best deal for you, you can contact the lender and move forward with buying your home.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: April 19, 2022

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