How FHA Loans Work: Eligibility, Features & Benefits
What Is an FHA Loan?
A competitive down payment
Borrowers can take out an FHA loan with a down payment of 3.5% of the property purchase price. This makes it easier for people without substantial savings to buy a home.
Flexible credit requirements
This program also offers more lenient credit score requirements than conventional home loans. Borrowers with credit scores under 600 may be able to qualify for 100% financing, while borrowers with scores in the 500's might be eligible with a down payment.
Mortgage insurance premiums
FHA loans require borrowers to pay two types of mortgage insurance. The first is the Upfront Mortgage Insurance Premium (UFMIP), which has a one-time fee equal to 1.75% of the total loan amount. This can be paid at closing or rolled into the loan balance. The second is the Annual Mortgage Insurance Premium (MIP), which is divided across the mortgage and added to the borrower's monthly payment.
What Can an FHA Loan Be Used For?
Buying a Primary Residence
With its flexible eligibility and down payment requirements, FHA loans are a great option for individuals and families who are buying their first home. Plus, third parties can contribute up to 6% of the loan amount to cover closing costs, which further reduces entry barriers.
Investing in a Multi-Family Property
FHA loans can also be used to purchase multi-family properties with up to four units, as long as the borrower intends to live in one of the units as their primary residence. This offers an option to generate rental income that helps offset mortgage payments without investing in a separate property using a different loan.
Making Energy-Efficient Upgrades
FHA loans also include programs like the Energy Efficient Mortgage (EEM), which allows borrowers to finance the cost of eco-friendly upgrades like solar panels, new insulation, energy-saving windows, and other sustainable property improvements.
Pros
- No borrower income limits
- Pay as little as 3.5% down
- Enjoy competitive terms and interest rates
- Streamlined refinancing options are available
Cons
- Maximum loan amount based on property location
- Properties must meet FHA standards for safety and livability, which limits the purchase of fixer-uppers
- Mortgage insurance premiums (MIP) are required for the life of the loan
Talk to our mortgage experts today about finding the right loan for you.
Alternatives to an FHA Loan
- USDA loans are backed by the U.S. Department of Agriculture
- No down payment required
- Property must be located in a designated rural or suburban area
- Income limits apply
- VA loans are exclusively for Veterans, service members, and eligible spouses
- Backed by the U.S. Department of Veterans Affairs
- No down payment or private mortgage insurance (PMI) needed
- Can only be used to purchase, refinance, or build a primary residence
- Fixed-rate mortgages provide stable monthly payments for the entire loan
- More flexibility to purchase different property types
- May lave larger upfront costs compared to government-backed loans
- Ideal for borrowers planning to stay in their home for an extended period
How Do I Know If an FHA Loan Is Right for Me?
You’re a first-time homebuyer
FHA loans have reasonable down payment requirements and flexible credit standards, making them easier to qualify for compared to conventional mortgages. The program also allows borrowers to use gift funds or grants for down payment and closing costs, which helps reduce the upfront financial burden of purchasing a house for first-time buyers.
The property is in good condition
Standard FHA loans are ideal for purchasing a home that is in good condition and meets the program’s safety and livability standards. Since the FHA requires an appraisal to ensure the property is safe and structurally sound, this program can't be used for properties in need of major repairs or renovations.
You have 3.5% of the purchase price in savings
The minimum down payment for an FHA loan is 3.5% of the home's total purchase price, which can be more manageable for borrowers with limited savings. However, if you don't have any money to put towards a down payment, a different loan program may be a better fit.
When Is the Best Time to Use an FHA Loan?
The best time to use an FHA loan is when you’re buying your first home or when competition in a high-demand market makes it difficult to save for a large down payment. When you need to move forward with a purchase quickly, this program can offer you flexible financing without the large upfront costs of other mortgages.
Another great time to use an FHA loan is when you’re preparing for a stable, long-term living situation. With competitive interest rates and Down Payment Assistance if you qualify, this type of mortgage is well-suited for borrowers who want to build equity over time in their forever home.
Get In Touch With a Loan Officer Today.
FAQ
Are there limits on the amount of money I can borrow with an FHA loan?
What are the FHA Minimum Property Requirements (MPRs)?
- A stable foundation
- A roof with at least 2 years of remaining life expectancy
- An electrical system that meets local codes
- Working heating and cooling
- Plumbing systems without leaks
- No lead-based paint
- No pest-infestations
- Windows that are lockable and can be opened
- No mold or mildew
- Proper ventilation in bathrooms and kitchens
- A safe and adequate water supply
- An appropriate waste disposal system
- Sidewalks and driveways in good condition
How long will it take to get my FHA loan approved?
Do I need to have a property inspection with an FHA loan?
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