In the simplest terms, an FHA loan is a type of mortgage insured by the Federal Housing Administration. The credit score and down payment requirements for FHA loans are minimal, which makes it possible to get a mortgage when you aren’t ready for a conventional loan.
The 5 Types Of FHA Loans
- Traditional Mortgage 203(b): The standard mortgage option.
- Energy Efficient Mortgage: For energy efficiency improvements like lowering utility bills.
- Section 245(a) Loan: Designed for borrowers anticipating future income growth. Of this type of loan, there are two options, a Graduated Payment Mortgage (GPM) and a Growing Equity Mortgage (GEM). A GPM begins with lower monthly payments that gradually rise, while a GEM has scheduled increases in monthly principal payments.
- 203(k) Rehab Mortgage: Designed for homes that require renovations and repairs.
- FHA Reverse Mortgage (HECM): Designed for homeowners aged 62 or older to convert home equity into cash.
FHA Loan Requirements
FHA loans have lower requirements when it comes to credit score and down payments compared to conventional loans. To meet the FHA loan eligibility criteria, you must meet the following:
- If credit score is between 500-579, a 10% down payment is required
- If credit score is 580 or higher, a 3.5% down payment is required
- Debt-to-income (DTI) ratio: Must be 50% or less
- Steady, verifiable income and employment history
- The property must be your primary residence (no vacation homes or investment properties)
- No foreclosure history within the last three years
Note that your downpayment can come from a number of sources, including savings, a financial gift, or via a downpayment assistance program. The timeline for closing on an FHA loan averages at 47 days, which is similar to conventional loans.
Pros and Cons of FHA Loans
Pros
When you consider that most conventional loans require at least 20% down and a credit score of 620 or higher, the lower requirements for credit scores and closing costs make FHA loans very enticing. They are backed by the government, which makes them less risky.
Cons
- The downside of FHA loans is that they can only be used for primary residences and have loan maximums.
- FHA loans also require an upfront mandatory mortgage insurance premium (MIP) that totals 1.75% of the amount you borrow as well as an annual mortgage insurance premium of 0.5% to 1.05% of your loan amount.
Max Amounts for FHA loans
While FHA loans have limits, the amounts are more than adequate to secure a property that meets your needs. For a single-family home in low-cost areas, you can receive a mortgage for up to $498,257 while in high-cost areas, your mortgage can be up to $1,149,825. The exact amounts will depend on the area and property type.
HUD Property Standard for Loans
The HUD requires that any property purchased with an FHA loan meet the following minimum requirements:
- Safe: The property must provide a good living environment with no health or safety hazards.
- Sound: There should be no structural damage to the home.
- Secure: The home should protect its occupants with functioning doors and windows.
An appraiser will evaluate these criteria and create a report for your mortgage application. Ensuring the home is safe and secure helps protect the lender, as they can resell the property in the event of foreclosure.
Is an FHA Loan Right For Me?
Once you’ve ruled out the possibility of other home loans, an FHA loan might be the perfect solution. This widely available, popular loan type can help you in many different home buying situations.
