Rebecca Richardson - Mortgage Consultant
FHA Loans Aren’t Just for First-Time Homebuyers!
You might think that Federal Housing Administration (FHA) Loans are only available to first-time homebuyers. Or that they’re only used by low-income individuals or those with bad credit. Although FHA Loans are most commonly used by these demographics, they don’t make up the full story.
More often than not, buyers, sellers, and real estate agents ignore FHA Loans due to the common misconceptions regarding who they’re for and how they should be used. The reality is that FHA Loans offer some of the most flexible guidelines in the industry, making it possible for a greater pool of individuals to be able to buy a home.
But before we dive into the benefits of FHA loans, the different types of FHA Loans, and the qualification standards, let’s discuss the Federal Housing Administration.
What is the FHA and What is a FHA Loan?
FHA stands for Federal Housing Administration, and they’re a branch of the United States Department of Housing and Urban Development. The FHA was created as part of the National Housing Act of 1934 in an attempt to make homeownership more affordable in the wake of the Great Depression and the Dust Bowl Drought.
An FHA Loan is a home mortgage that’s insured by the Federal Housing Administration and issued by an approved bank or lender. These loans come with lower down payment and credit score requirements than most conventional loans, hence why they are so popular with first-time homebuyers.
How to Qualify for a FHA Loan
There are a few benchmarks that borrowers need to meet to qualify for an FHA Loan. While these minimum requirements exist, they may vary depending on the lender. You can find some of the basic guidelines below:
Minimum Credit Score: 500
Down Payment: 3.5% with a credit score of 580+; 10% for a credit score of 500-579.
Gift assistance can apply for FHA loan down payments, but they must be well-documented with donor contact information, their relationship to the borrower, the amount of the gift, and guarantees that the gift assistance will not have to be repaid by the borrower to the donor.
Property Approval: The property must be appraised by an FHA-approved appraiser and must meet livability and safety standards.
Loan Terms: 15 or 30 years
Debt-to-Income Ratio: Total monthly debt payments must be less than 56% of monthly gross income.
Types of FHA Loans
Now that you’re up to speed on some of the qualification requirements, let’s dive into the different types of FHA loans:
Traditional Mortgage 203(b)
This is the type of loan that most people are referencing when they discuss FHA loans. These loans require a 10% down payment for individuals with a credit score of 500-579 and as little as 3.5% for scores greater than 580. A traditional loan can only be used on properties that will be used as the borrower’s primary residence, and the borrower must occupy the property within 60 days of closing. Several types of homes and fixed & adjustable rates are eligible.
FHA 203(k) Loan
Flipping a house can be a great way to secure your dream home without breaking the bank. With an FHA 203(k) loan, you can buy or refinance a home which needs work and consolidate the renovation costs into the mortgage. There are some strict guidelines for what sorts of repairs qualify for this loan; if you’re curious about the options, myself or a member of my team will be more than happy to talk through them with you.
Section 245(a) Loan
Typically, individuals’ income increases over time. A Section 245(a) Loan—also known as a Growing Equity Mortgage—has a low initial monthly payment that gradually increases over time.
Pros and Cons of FHA Loans
Advantages of FHA Loans
Flexible qualification guidelines make it easier for individuals to buy a home.
Qualifying down payments as low as 3.5%.
There is a wide range of property types which qualify for an FHA loan. Individuals could potentially buy a 2-to-4-unit property, live in one of the units, and rent out the others for extra income.
Historically, FHA loans offer better fixed interest rates when compared with other loan types. However, as with all other mortgages, factors like current market conditions, as well as a borrower’s income, credit score, down payment, the amount they plan to borrow, and the loan term will affect the qualifying mortgage rate.
Drawbacks to FHA Loans
FHA mortgage insurance lasts the full term of the loan for borrowers with a down payment less than 10%.
Properties must meet strict health & safety standards set by the FHA.
Can only be used to purchase primary residences. Second homes and investment properties do not qualify.
Restrictive loan maximums create a ceiling for qualifying properties and areas.
FHA vs. Conventional Loan
Now that we’ve broken down what an FHA loan is and how to qualify for one, let’s touch on how it differs from a conventional loan. As previously mentioned, FHA loans are backed and insured by the Federal Housing Administration—a government agency—and conventional loans are not. Where the two loans differ mostly are the qualification standards.
Generally, where FHA loans allow a minimum credit score of 500, a conventional loan typically bottoms out at 620 (though some borrowers with a credit score in the low-to-mid 600s may find that a FHA loan costs less per month). FHA loans allow borrowers to put as little as a 3.5% down payment while conventional loans get as low as 3% for certain borrowers.
It’s important to mention that neither of these loans are generally better than the other. When buying a home, remember that everyone’s situation is different and that these different home loan options exist to best cater to each borrower’s unique needs.
Is an FHA Loan Right For You?
At the end of the day, everyone’s situation is unique when it comes to buying a home. That’s why it’s important to keep an open mind when you’re shopping for your home loan. If you’re interested in learning more about whether or not an FHA loan is right for your situation, feel free to contact a member of my team!