FHA Loans Guide

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A program of the Department of Housing and Urban Development, the Federal Housing Administration (FHA) insures mortgages for individuals who might not otherwise be able to attain one.

FHA loans are a great option for first-time homebuyers as they are much easier to qualify for than traditional mortgages.

These mortgages help people with lower credit scores and incomes purchase homes with friendly terms.

FHA loans have fixed-rate terms of 15 or 30 years and low down payments (as little as 3.5%).

FHA loan limits

FHA loan limits vary depending on the area of the country you are in. The FHA updates its lending limits on an annual basis and takes factors such as area and type of home into consideration.

You can use an FHA loan to buy your primary residence or a location that will help you earn rental income, as long as that income will cover the amount of the mortgage.

The FHA loan limits for low-cost areas in 2019 are:

  • $314,515 for an individual home (single family, townhouse, condo, etc.)

  • $403,125 for two-unit complexes

  • $487,250 for three-unit complexes

  • $605,525 for a four-unit complexes

For high-cost areas, the loan limits are:

  • $726,525 for an individual home (single family, townhouse, condo, etc.)

  • $930,300 for two-unit complexes

  • $1,124,475 for three-unit complexes 

  • $1,397,400 for four-unit complexes

Depending on where you live, you’ll have to find a home that falls within these lending limits and meets the other requirements of the FHA. Since the FHA is just insuring the loan, not actually providing it, you will have to speak with your chosen lender to get the details for your specific situation.

Closing costs

The FHA determines which closing costs are allowed to be charged to borrowers. These requirements are determined by your local FHA office.

Typical closing costs include:

  • Lender's origination fee

  • Deposit verification fees

  • Attorney's fees

  • The appraisal fee and any inspection fees

  • Cost of title insurance and title examination

  • Document preparation (by a third party)

  • Property survey

  • Credit reports (actual costs)

  • Transfer stamps, recording fees, and taxes

  • Test and certification fees

  • Home inspection fees up to $200

FHA loans vs. conventional loans

Conventional mortgages and FHA loans differ in a number of ways.

First, FHA loans have lower credit score requirements. For conventional mortgages, you typically need a score of at least 620. For FHA mortgages, borrowers with credit scores as low as 500 can qualify for a loan.

FHA loans also have more lenient down payment requirements. FHA loans require a 3.5% down payment for borrowers with a credit score of 580 or greater and 10% for borrowers with credit scores between 500 and 580. Conventional mortgages may require a down payment of up to 20%.

Lastly, conventional loans often require borrowers to purchase Private Mortgage Insurance if they are not able to make at least a 20% down payment. FHA loans require an up front Mortgage Insurance Premium and an annual Mortgage Insurance Premium (MIP).

FHA Loan Requirements

You have to meet the following requirements (Page 325)  to be eligible for an FHA loan:

  • FICO score of at least 580 for a 3.5% down payment; 500 - 579 for a 10% down payment

  • Debt-to-income ratio under 43%

  • Proof of steady income

  • Proof of employment

As long as you meet these requirements, you will likely qualify for an FHA loan.

FHA Loan Advantages

FHA loans are a great option for buyers for a number of reasons.

First and foremost, they are much easier to qualify for than traditional loans. Even those with low credit scores, low income, and/or poor credit history can qualify.

Since FHA loans are government-backed and only available through approved lenders, they typically offer very low interest rates.

Even if you don’t have a strong credit history, FHA lenders can use your payment history from things like utilities, rent, and other bills to prove your financial capabilities.

All things considered, FHA loans are often a good option for buyers, particularly those who would have trouble qualifying for a conventional mortgage.

How to Get an FHA Loan

Getting an FHA loan is a fairly easy process, but it’s important to be prepared.

It’s important to understand what you can do before applying for a loan and how to apply for an FHA loan.

- Save for a down payment

As mentioned earlier, FHA loans require a 3.5% or 10% down payment, depending on your credit score.

It’s important to know what your current credit score is so that you can accurately determine how much your down payment should be.

Also, make sure to review the FHA loan limits before shopping for your home.

- Find an approved lender

If you have decided to apply for an FHA loan and you meet the requirements, you need to find an FHA-approved lender to start the application process.

You can search for lenders near you via the HUD lender list search. Be sure to pick at least a few lenders from this list to compare rates and terms. This will help make sure you find the best lender for your needs.

- Apply

Filling out an FHA loan application can be a time-consuming process, so it’s important to make sure you have the necessary documentation at hand.

You will need:

  • Your social security number

  • Employment history

  • Current pay stubs and proof of income

  • Information on other outstanding loans

  • Bank statements

  • Tax returns

  • Identification

  • Previous address(es)

Having these documents at your side will help you complete your application quickly and accurately.

- Get insurance

Since FHA-insured loans are intended to help “riskier” borrowers achieve goals of homeownership, there are extra costs to help lenders feel more secure. 

At closing, you are required to pay an Upfront Mortgage Insurance Premium (though this is often included in the total amount financed), and each month you will pay a portion of your annual Mortgage Insurance Premium (MIP) as part of your mortgage payment. 

The amount varies depending on several factors, including the term of your loan and the down payment you made. Your down payment will also affect your loan-to-value (LTV) ratio, which directly impacts how long you have to pay MIP.

The LTV is a percentage that reflects the amount of your loan divided by the value of your home (the appraised value or purchase price, whichever is lower). The date of your loan application and LTV will determine how long you have to pay MIP, which could be as few as 11 years, or as long as the entire life of the loan. Your lender can give you a better idea of the MIP costs and terms for your specific situation. 

- Get an appraisal

The FHA also requires borrowers to get an appraisal for the home they wish to purchase.

An FHA-approved appraiser will inspect your home to ensure that it complies with their rules and standards. You may also get a home inspection to make sure that your home is in good condition.

- Closing checklist

Once you have been approved for the loan and decided to purchase a home, it’s important to review this checklist, which covers all fees and documents that will be required at closing.

At closing, you will need:

  • Identification for all parties involved in the transaction

  • To pay for title insurance that ensures the property is free from claims and liens

  • To purchase a homeowner’s insurance policy

  • To pay for all closing costs in the form of a wire transfer or cashier’s check

Frequently Asked Questions

- Are there different types of FHA loans?

There are a number of different FHA loan programs. This includes programs to help people improve the energy efficiency of their home, borrow against their home equity, and more. You can review these programs to find the right loan for you.

- How much are mortgage insurance premiums?

The FHA will require an annual Mortgage Insurance Premium for either 11 years or the lifetime of the mortgage, as well as an Upfront Mortgage Insurance Premium (UFMIP) due at closing. Almost all borrowers will pay 1.75% of the base loan amount as the UFMIP. The annual MIP depends on the base value of the loan and the LTV. 

  • As a program administered by the federal government, the full, thoroughly comprehensive, handbook for the FHA program can be accessed here, but you’d do much better checking with your lender to see what your situation will require.

- What if I can’t afford a down payment?

If you need help with your down payment, you may need to receive help from a third party. The FHA regulates who is able to provide these financial gifts.

You may receive gifts from:

  • A family member

  • Your employer or labor union

  • A friend with a documented interest in you

  • A charitable organization

  • A government agency or public entity that provides homeownership assistance

Typical cost is

$922/Month

Based on a 30-Year Fixed rate mortgage monthly payment for a $200,000 loan at 4%