FHA FAQs: Answers to All Your Questions About FHA Mortgage Loans

The FHA endorsed more than 1.3 million home mortgage loans in the fiscal year 2020. FHA loans are popular among homebuyers, in part because they require a lower minimum down payment and lower credit scores than many conventional loans. But despite the popularity of these loans, borrowers often have questions about how they work or the requirements to qualify for one.

Here are the answers to some FHA FAQs to help you decide whether an FHA loan is right for you.

What is the FHA?

The Federal Housing Administration (FHA) is a federal government agency and an arm of the U.S Department of Housing and Urban Development (HUD). The FHA provides mortgage insurance on home loans issued by FHA lenders. The agency is the largest insurer of mortgages in the world.

What types of FHA loans are available?

The FHA offers several types of mortgages, including:

• Fixed-rate mortgage
• Adjustable-rate mortgage
• Basic home mortgage loan 203(b)
• Condominium mortgage
• Disaster victims mortgage 203(n)
• Energy-efficient mortgage (EEM)
• Hawaiian home lands (HHL)
• Home equity conversion mortgage (HECM)
• Rehabilitation Mortgage 203(k)
• Renovation loan
• Manufactured home mortgage
• Streamline refinance
• Title I home improvement loans
• Urban renewal mortgages

Who offers FHA loans?

The FHA doesn't offer loans directly. Instead, it works with approved private lenders to provide mortgage loans. That means you don’t have to visit the FHA website or contact the agency directly to take out a loan. You might be able to use a lender you already do business with, or you can choose another approved lender altogether.

Many banks offer FHA loans, from small community banks or credit unions to the largest lenders, such as JPMorgan Chase & Co. and Rocket Mortgage.

What are the requirements for an FHA loan?

For an FHA home loan, you’ll generally need to meet the following eligibility requirements:

• Home must be your primary residence
• No foreclosures within the past three years
• Minimum down payment of 3.5%, if your credit score is 580 or higher
• Minimum down payment of 10%, if your credit score is between 500 and 579
• Debt-to-income ratio (DTI) between 43% and 50%
• Must have documentation that demonstrates a steady employment history

As part of the underwriting process, lenders often check your front-end and back-end DTI ratios. Your front-end ratio is the percentage of your gross monthly income that goes toward your housing expenses, such as your mortgage, property taxes, and homeowners insurance. Generally, your front-end ratio typically shouldn’t exceed 31%.

Mortgage lenders are typically more concerned with your back-end ratio, which includes your monthly debt payments, including future mortgage payments, other loan payments, credit card payments, alimony, and child support. Generally, you’ll need a back-end DTI of 43% to qualify for an FHA loan, but in certain cases, you might be approved with a DTI as high as 50%.

Do FHA loans require mortgage insurance?

Borrowers are required to pay FHA mortgage insurance for all FHA loans as a way to decrease the risk for lenders. There’s an upfront premium of 1.75% of the loan amount that’s due at closing. Borrowers will also pay monthly mortgage insurance premiums, which total between 0.80% and 1.05% of the loan balance per year.

If you’re unable to pay the upfront mortgage insurance fee, you might be able to roll the premium into your mortgage, depending on the lender you work with. Note, choosing this option will increase the loan amount and the overall cost of your loan.

For FHA loans, you won’t be eligible for automatic removal of mortgage insurance unless your loan originated on or before June 13, 2013. To be eligible, you need to make on-time mortgage payments for five years and have at least 22% equity in the property.

If your FHA loan originated after June 13, 2013, you’ll need to refinance to a conventional loan and have a loan-to-value ratio not exceeding 80% in order to drop your mortgage insurance.

How do FHA loans differ from conventional loans?

When it comes to FHA vs. conventional loans, the two loan types differ in several ways. FHA loans generally require a credit score of at least 500, whereas you’ll typically need a 620 score or higher to qualify for a conventional loan.

Also, FHA lenders might extend loans to borrowers with as little as a 3.5% down payment, depending on your credit score. Although you might be able to get a conventional loan with 3% down, many lenders prefer down payments to be much higher — often up to 20% of the home’s purchase price.

Conventional loans also typically require mortgage insurance if your down payment is less than 20%. However, you can usually cancel the mortgage insurance on a conventional loan once you have 20% equity in your home. With an FHA loan, you’ll pay mortgage insurance premiums for the life of your loan unless you refinance to a conventional loan.

Interest rates on FHA loans vary by lender, and they could be a good option for those with lower credit scores. However, as with other types of home loans, you might find better interest rates on FHA loans if your credit is strong.

Whether you want an FHA or conventional loan, it’s a smart idea to shop around with the best mortgage lenders to find the best rate and terms.

Can you get an FHA loan for an investment property?

One requirement for FHA loans is that the buyer must live in the home they purchase as their primary residence. As such, FHA loans may not be used to finance an investment property you don’t plan to live in, vacation home, second home, or rental property.

However, the FHA allows you to get an FHA loan for a property with up to four units if you plan to live there. By making one unit your primary residence, you’ll satisfy the owner-occupancy requirement for FHA loans. You could then rent out the other units for income if you choose.

Do you need good credit for an FHA loan?

You could qualify for an FHA loan even if your FICO scores fall in the poor (less than 580) or fair (between 580-669) credit ranges.

If your credit score is 580 or above, you might be eligible for an FHA loan with a 3.5% down payment. You might also be able to qualify with a FICO score as low as 500 if you’re putting down at least 10%.

Can you get an FHA loan after a foreclosure or bankruptcy?

It might be possible to get an FHA loan, even if you have credit issues such as a foreclosure or bankruptcy. To qualify for an FHA-insured loan, you must be at least three years removed from a foreclosure. You might also be eligible for an FHA loan if you’ve made one year of on-time payments on a Chapter 13 bankruptcy or two years after a Chapter 7 bankruptcy.

In addition, you need to rebuild your credit to meet the FHA’s requirements.

Are FHA loans a good option for first-time homebuyers?

In the fiscal year 2020, the FHA issued 817,837 mortgage loans to homebuyers, with first-time homebuyers representing 83.1% of those loans. FHA loans might be a good option for first-time homebuyers in large part due to their low down payment and credit score requirements.

FHA loans might also benefit first-time homebuyers with less employment history. Although you must have two years of employment history, it doesn’t all have to be with the same employer. Conventional loans may have more stringent requirements related to employment history.

What are FHA loan limits for 2021?

In December 2020, the FHA announced new loan limits for single-family home purchases in 2021. The nationwide “floor” in low-cost areas is $356,362, whereas the “ceiling” in high-cost areas is $822,375. To find out the FHA loan limits in your area, use this FHA Mortgage Limit tool from the U.S. Department of Housing and Urban Development (HUD).

There are some exceptions to these FHA loan limits. For instance, the FHA Energy Efficient Mortgage (EEM) might allow borrowers to finance home improvement projects in addition to their mortgage loans, even if the cost of qualifying improvements causes the total loan to exceed the limits. Please refer to this fact sheet for more details.

Do you need to pay closing costs with FHA loans?

You need to pay closing costs with FHA loans, however, there could be some options to lighten the burden. For instance, you might be able to roll most or all of your closing costs into your loan, depending on the lender you work with.

You could also use gift money or grant funds to cover closing costs. For instance, you might get gift money from a family member or a special grant through a first-time homebuyer program in your state.

Under FHA rules, the seller or another third party could also pay closing costs up to 6% of the property’s price. So it might be possible to negotiate this into your purchase.

How do you apply for an FHA loan?

Here’s how to get a loan from an FHA-approved lender. The first step is finding a lender you want to work with. Depending on the lender, you might either apply for a loan in person or apply online. Before you start the loan application, gather some essential information such as:

• W-2 forms or other documentation proving employment for the last two years
• Your two most recent pay stubs
• Other sources of income (Social Security, disability, rentals, etc.)
• Two years of tax returns
• Bank and investment statements
• A list of debts and minimum monthly payments
• Your contact information
• Social Security number
• Profit and loss statements if you are self-employed

Bottom line

The FHA doesn’t issue loans directly. Instead, they work with partner lenders. An FHA loan may be a good option for low to moderate-income borrowers who want to take advantage of lower down payments and interest rates, among other benefits.

However, FHA loans might come with higher costs than other types of loans. For instance, mortgage insurance will be required for the life of your loan. As with other mortgage loans, it’s smart to shop around to ensure you’re getting the best possible interest rate and terms.