An FHA loan is a type of mortgage that is insured by the Federal Housing Administration, a subsidiary of the Department of Housing and Urban Development (HUD).
FHA loans are issued by private lenders but backed by the federal government. This allows lenders to offer more favorable loan terms to first-time and low- and moderate-income homebuyers.
Table of contents
- How do FHA loans work?
- Types of FHA loans
- FHA vs. conventional loans
- Additional factors to consider
- How to qualify for an FHA loan
- How to apply for an FHA loan
How do FHA loans work?
The FHA provides mortgage insurance on home loans issued by FHA-approved lenders. These mortgages can be used to purchase single-family or multifamily homes, residential care facilities and hospitals.
According to HUD.gov, FHA mortgage insurance protects lenders against losses. For example, if a borrower fails to pay back the mortgage, the FHA will cover a portion of the unpaid principal balance. This minimizes risk for lenders and allows them to offer borrowers more favorable loan terms.
To qualify for an FHA-backed loan, you must meet specific requirements, including a minimum FICO score determined by the down payment amount. Borrowers must also pay mortgage insurance premiums (MIP), collected via lenders and used to fund FHA mortgage insurance programs.
Types of FHA loans
The most popular FHA-backed home loans are traditional mortgages, also known as Basic Home Mortgage Loan 203(b). You can use this type of loan to purchase or refinance a primary residence.
With a 203(B) loan, you can finance up to 94.5% of the home's value, so your down payment could be as low as 3.5% of the purchase price. Compare that to the typical conventional mortgage, which requires a 20% down payment if you want to avoid private mortgage insurance (PMI).
Other types of FHA-insured mortgage loans include:
- Home Equity Conversion Mortgage (HECM): This is an FHA-backed reverse mortgage, only available to borrowers over the age of 62, who own equity in their homes. Used to supplement income, the borrowers must remain in the home as their principal residence, pay home and property taxes, and keep the house fit to occupy.
- HECM for purchase: With similar requirements than the standard HECM, this loan is meant to help borrowers use the proceeds from their reverse mortgage to purchase a new home, often due to downsizing or a move.
- 203(k) Rehabilitation Mortgage: This loan is for homeowners or potential homeowners interested in renovating their home or planning on making significant renovations in their future residence. With an FHA 203k loan, homebuyers can add up to $35,000 to their mortgage loan amount for home repairs and upgrades. Qualifying homes must be at least one year old and borrowers must have a signed contract with a state-licensed contractor.
- Title I Home Improvement Loans: Insures home improvement loans. The maximum loan amount for a single-family home is $7,500 for unsecured loans or $25,000 for loans secured by a mortgage or deed of trust. A Title I loan may be used to purchase or refinance a manufactured home.
- Energy-Efficient Mortgages (EEM): Through the EEM program, the FHA insures a mortgage loan to purchase or refinance a primary residence while adding energy-efficient improvements. These could include weatherization and insulation, upgrading HVAC systems, and installing solar- or wind-power systems.
- Streamline Refinance: Allows homeowners to refinance an existing FHA mortgage with limited credit documentation and fewer underwriting guidelines than conventional refinance loans.
- 203(h) Disaster Victims Mortgage: Insures primary residence mortgages for people living in presidentially-designated disaster zones. Borrowers are eligible for 100% financing — no down payment required. Funds can be used to reconstruct a damaged or destroyed home or purchase a new home.
- Section 245(a) Graduated Payment Mortgage or Growing Equity Mortgage: Meant for borrowers whose income is expected to increase, Section 245 (a) of the National Housing Act created this loan with low initial payments that go up over time. They’re only available for single-unit primary homes, but homebuyers can choose between five different plans with varying lengths and payment increases.
- Mobile and manufactured home loans: Some FHA-approved lenders offer loans to purchase mobile or manufactured homes. To be approved for this loan, the homebuyer or homeowner must have a lease of at least three years at a manufactured home community or trailer park. This loan comes in 15-, 20-, and 25-year terms and as an adjustable-rate mortgage (ARM). To qualify, the borrower must show enough income to pay the mortgage and plan to make the mobile or manufactured home their primary residence.
FHA vs. conventional loans
Conventional mortgages are home loans that are not insured by the federal government. Most conventional mortgages are conforming loans, which means they meet the funding guidelines of government-sponsored mortgage enterprises Fannie Mae and Freddie Mac. Since a government agency does not insure conventional conforming loans, their credit and income qualification requirements are stricter.
On the other hand, FHA home loans have more flexible qualification criteria, including lower interest rates and down payment, credit, and income requirements. In addition to monthly mortgage payments, FHA borrowers must pay both upfront and annual mortgage insurance premiums.
|FHA Mortgages||Conventional Mortgages|
|Min. FICO score of 580 and 3.5% down payment, or 500–579 with 10% down||Min. FICO score of 620 for most lenders and 3%–20% down payment|
|Can use gift funds for the entire down payment||Limits gift funds for the down payment|
|Sellers can contribute up to 6% for closing costs||Sellers can only contribute up to 3% for closing costs|
|DTI can be as high as 50||DTI cannot exceed 36%|
|Only for the purchase of a primary residence, not investment properties||Can be used to purchase a second (or third) residence or an investment property|
|Mortgage insurance is mandatory||You don’t need mortgage insurance with a 20% down payment or 20% in equity|
|The property must be FHA-approved||You can purchase any property|
|FHA loan limits are set by HUD and vary by location||Conventional loan limit depends on your lender, income, creditworthiness, and other factors|
|No maximum or minimum income limits||Some government-backed programs have income caps|
Additional factors to consider
While FHA loans are great for prospective homeowners who do not meet the credit and down payment requirements for conventional mortgages, these types of loans have limits and features worth going over in more detail.
FHA loan limits
The FHA restricts how much you can borrow depending on the median sales price of houses in your jurisdiction and the number of units in the home.
The FHA mortgage limits database offers information about loan limits by county. For 2021, the limit for a one-unit home in a low-cost real estate area is $356,362, while the ceiling in high-cost areas is $822,375.
Mortgage Insurance Premiums
There are two components to FHA mortgage insurance premiums: an upfront premium payment and an annual payment.
The upfront mortgage insurance premium (UFMIP) is due at closing — or can be folded into your monthly payments — and will equal 1.75% of the loan amount. The annual MIP amount may be paid monthly and will depend on your loan amount, down payment and loan term.
How to get rid of MIP on FHA loans
According to The Mortgage Reports, if your FHA loan originated between January 2001 and June 3, 2013, you may be eligible to cancel MIP once your loan balance reaches a 78% loan-to-value ratio (LTV).
To discontinue your MIP, your lender may require you to be up to date with mortgage payments or to have paid MIP for at least five years.
You cannot cancel MIP if:
- Your FHA loan closed between July 1991 and December 2000
- Your FHA loan originated after July 13, 2013
If you are not eligible for MIP cancellation, the only way to get rid of mortgage insurance premiums is to refinance your FHA loan into a conventional mortgage — or a VA loan if you are an eligible veteran.
Before refinancing, discuss your options with your lender to make sure that is the best decision for someone in your situation.
How to qualify for an FHA loan
For most borrowers, qualifying for an FHA loan can be easier than qualifying for a conventional mortgage, but there are a few requirements to keep in mind.
Here is a summary of FHA eligibility requirements:
- A minimum credit score of 500
- 500–579: 10% minimum down payment
- 580 or higher: 3.5% minimum down payment
- Maximum 43% debt-to-income ratio (DTI)
- A steady source of income
- A valid social security number
- The house must be your primary residence for at least one year
- You must move in within 60 days of loan closing
- The home must meet FHA safety guidelines
- The loan can’t exceed loan limits in your county
Keep in mind that although FHA loan requirements are the same everywhere, some lenders may have additional credit score requirements for approval.
You will also have to cover appraisal and credit report fees, among others.
How to apply for an FHA loan
- Find an FHA lender. To find a lender that offers FHA loans, go to the HUD Lender List and search for qualified institutions in your area. Our list of the best mortgage lenders may also be a good place to start.
- Apply. Once you’ve selected a lender, fill out their application and provide all the information they need to process your request, including pay stubs, bank statements and old tax returns. The lender will also look into your credit history to calculate your debt-to-income ratio.
- Compare loan offers. Shop around and request quotes from more than one lender to make sure you’re getting the best loan terms and mortgage rates. Interest rates can vary between lenders, even for federally-regulated programs like FHA-backed loans. Our mortgage calculator can help you determine which loan is right for you.
- Research down payment assistance programs. Many states have programs to help low-income earners and first-time homebuyers purchase homes. To qualify for an FHA loan, you need to make a down payment of at least 3.5%, but this money can come from your savings, gift money or down payment assistance programs.
FHA Loans FAQs
What is an FHA 203(k) loan?
What is the minimum credit score for an FHA loan?
How soon can I refinance an FHA loan?
You typically have to wait seven months after closing your FHA mortgage before you can refinance to a conventional loan.
If you are interested in another FHA loan program, you can opt for an FHA streamline refinance, which features a quicker application process than conventional mortgage refinancing. That said, to qualify for this type of refinance, you must have been paying the original mortgage for six months.
How long after bankruptcy can I get an FHA loan?
It depends on the type of bankruptcy filing. After a Chapter 7 bankruptcy, borrowers must wait a minimum of two years plus any additional time required by the lender to apply for an FHA loan. The waiting or "seasoning" period starts once the bankruptcy is discharged, not filed.
In the case of a Chapter 13 bankruptcy, the FHA allows lenders to consider applications from borrowers who are still paying, provided payments have been made on time for at least a year.
If you've had a foreclosure in the past, the FHA also enforces a seven-year waiting period from the end of the foreclosure proceedings before you can apply for an FHA mortgage.
Summary of Money's guide to FHA loans
- FHA loans help make homeownership more affordable for those who don't have good credit or enough money for a down payment on a conventional loan.
- The FHA doesn’t lend money, FHA-approved lenders do, but the FHA is responsible for settling the debt if you fail to repay the loan.
- The most common type of FHA loan is the Basic Home Mortgage Loan 203(b).
- To apply for a 203(b) loan, you need a credit score of at least 580 for a 3.5% down payment or 500–579 for a 10% down payment.
- Unlike conventional mortgage loans, the down payment can come from your savings, gift funds, or government programs.
- You must pay monthly mortgage insurance premiums (MIP) and an upfront mortgage insurance premium (UFMIP) upon the origination of an FHA loan.