During the depths of the Great Depression in the 1930s, the American housing market was completely decimated. Foreclosure rates and loan defaults rose sharply higher, and people who wanted to buy a house either couldn’t afford one or couldn’t qualify for a loan from their local bank.
In 1934, Congress passed The National Housing Act which created the Federal Housing Administration (FHA). This agency was established primarily to increase home construction, reduce unemployment, and operate various loan insurance programs in order to help restore the housing market.
Though much has changed in the past 83 years, the FHA is still helping low-to-moderate income people to purchase a house. Without the assistance from the FHA, it’s unlikely that most of these people would qualify for a home loan from a conventional lender.
What is an FHA Loan?
The FHA does not make loans. Instead, it insures loans made by FHA-approved private lenders. The FHA provides the lender with a guarantee of payment in the event of a default. It is this insurance against default that allows riskier, lower income Americans to borrow money for the purchase of a home that they would not otherwise be able to afford.
In addition, FHA-insured loans also reduce some of the costs compared to a conventional mortgage loan. They require smaller down payments, lower closing costs, and have more relaxed lending standards to help applicants qualify for a loan. Plus, applicants are allowed to receive financial gifts from a family member, employer or charitable organization, which can account up to 100% of their down payment.
FHA-insured loans enable more people to achieve home ownership by allowing borrowers who have less than perfect credit, no credit history, or who may have experienced some financial missteps, like a foreclosure or bankruptcy, to qualify.
The program has become popular with first-time home buyers and move-up buyers because they can purchase a house with a low down payment, qualify easier with lower underwriting standards, and FHA loans traditionally have lower rates than conventional loans.
With low rates, low down payment options, and flexible lending guidelines,
FHA loans are a top choice for today's buyers.
FHA Mortgage Insurance
For all the benefits of an FHA-insured loan, there is one downside. If you seek an FHA loan, you have to obtain mortgage insurance, which remains for the life of the loan.
To obtain mortgage insurance from the FHA, an upfront mortgage insurance premium equal to 1.75% of the base loan amount is required at closing. Typically, this amount gets rolled into your loan and your lender will make the payment to the FHA on your behalf.
In addition, there is a monthly mortgage insurance premium that is also required and it lasts for the duration of your loan. These premiums can be folded into your monthly payments as well. The premiums are calculated based on your loan amount, the loan-to-value ratio, and the term of your mortgage. Most FHA borrowers should expect to pay a premium of 0.85%.
FHA Borrower Qualifications
In order to qualify for an FHA-insured loan, certain requirements must be met. The FHA requires a minimum credit score of at least 580 to qualify for the 3.5% down payment advantage. However, a lower credit score doesn’t automatically disqualify you.
Various FHA lenders have various requirements. Some might allow a lower credit score and some might insist on a higher score. This is why it pays to shop multiple lenders for your FHA loan.
In addition to the credit score, there are other requirements as well:
- Have a valid Social Security number
- Provide proof of U.S. citizenship, evidence of legal permanent residency or eligibility to work in the U.S.
- Be old enough to sign for a mortgage under your state’s borrowing laws
- Purchase a one-to four-unit property
Types of FHA Loans
FHA loans are available for single-family detached homes, two to four unit homes, condos, and manufactured and mobile homes. In addition, FHA loans are available for “fixer-upper” properties.
If you want to buy a house that needs repairs, you can use an FHA loan to roll the cost of your mortgage and renovation expenses into one loan. Likewise, to make renovations to a home you already own, you can refinance the mortgage balance and add in the cost of repairs.
Below are all the different types of loans that FHA offers to borrowers:
Fixed Rate FHA Loan
An FHA loan benefits those who would like to purchase a home but haven't been able to put money away for the purchase, like recent college graduates, newlyweds, or people who are still trying to complete their education.
Adjustable Rate Mortgage (ARM)
The FHA adjustable rate mortgage is a HUD mortgage specifically designed for low and moderate-income families who are trying to make the transition into home ownership.
FHA Secure Refinance Loan
Many homeowners with adjustable rate mortgages find themselves in financial trouble because of current interest rate increases. FHA Secure refinancing can help when foreclosure is a threat.
FHA Reverse Mortgage Loan
An FHA reverse mortgage is designed for homeowners age 62 and older. It allows the borrower to convert equity in the home into income or a line of credit.
Energy Efficient Mortgage Loan
The FHA Energy Efficient Mortgage program helps current or potential homeowners significantly lower their monthly utility bills and incorporate the cost of energy efficient improvements into their mortgages.
Graduated Payment Mortgage Loan
Graduated Payment Mortgages are FHA loans for home buyers who currently have low to moderate incomes but expect them to increase substantially over the next five to ten years.
Growing Equity Mortgage Loan
FHA Section 245(a) allows those who currently have a limited income, but expect that their monthly earnings will increase, to purchase a home with the help of a Growing Equity Mortgage in which payments start small and increase gradually over time.
FHA Loans for Condominiums
FHA condominium loans, sometimes called condo loans, are specifically designed toward those who purchase housing units in a condominium building.
How to Find an FHA-Approved Lender
The FHA requires all mortgage lenders to receive approval from the agency prior to offering their loans. If you want to apply for an FHA-insured loan, you must first find an FHA-approved lender.
Fortunately, it's very easy to find these lenders. The FHA maintains searchable databases of agency-approved lenders throughout the country, and you can use this search tool to get started. Additionally, our editors also their updated selections for best mortgage lenders of the year.