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Types of FHA Loans

Updated January 14, 2019
7 min read

The FHA loan program offers subsidized mortgages for as little as 3.5% down. A favorite for first-time homebuyers, the different types of FHA loans offer surprising flexibility. The types of FHA loans allow buyers to choose from a variety of features and to purchase many different styles of homes, including condos and even fixer-uppers.

Fixed Rate FHA Loan

FHA loans have become a common mortgage choice for individuals who don't have a lot of cash on hand to make a large down payment. It's also pairs well with assistance programs for first-time homebuyers.

Available in a fixed-rate term between 15 and 30 years, FHA mortgages allow for a minimum down payment of just 3.5%, which is one of the lowest on the market. Rates are competitive, and they have very inclusive credit-guidelines. Many lenders will approve FHA loans for borrowers with credit as low as 580.

You can use an FHA loan for most property types, including:

  • Manufactured
  • Mobile
  • Townhomes/Condos
  • Multi-unit (up to 4 units)
  • Single-family

The standard FHA loan is a great product that has helped open the door to homeownership for many, but it’s not without its faults. For example, you can only hold one FHA mortgage at a time, so investors should look elsewhere. Some are put off by the FHA’s monthly mortgage insurance premiums, which stick around for the life of the loan unless you pay more than 10% down.

Adjustable Rate FHA Loan

As the name suggests, an FHA adjustable rate mortgage (ARM) comes with an interest rate that changes - generally for the worse - over the life of the loan. Many people are drawn to ARM mortgages because they offer initial rates significantly lower than a fixed-rate product.

Loan qualification standards for an FHA ARM are essentially the same as the standard FHA loan.

There are three types of FHA ARM loans:

  • 1- and 3-year ARMs: Can increase up to 1 point after the initial 1 or 3 year fixed period. Lifetime increase capped at 5%.
  • 5-year ARMs: Can increase either up to 1 point per year after a 5-year fixed period with a 5% lifetime increase cap, OR up to 2% per year after a 5-year fixed period with a 6% lifetime increase cap.
  • 7- and 10-year ARMs: Can increase up to 2 points per year after a 7- or 10-year fixed period with a 6% lifetime increase cap.

This type of FHA loan might be right for you if you plan to sell your home before your rate increases significantly, or if you anticipate pay increases that will allow you to afford your mortgage at a higher rate.

These types of mortgages fell out of favor after 2007, but are gaining popularity. Still, be cautious when considering an ARM. Rates increase according to market activity, meaning your monthly ARM payment will be unpredictable.

Section 245(a) Graduated Payment Mortgage

The FHA 245(a) loan is a fixed rate graduated payment mortgage, also known as a growing equity mortgage. Qualification guidelines are similar to the standard FHA home loan.

With a graduated payment mortgage, your monthly payment increases over time according to a set schedule. As your loan amortizes, you’ll reach a point in time when your equity makes rapid gains.

While this is technically a 30-year loan, you’ll likely pay off your loan early, depending on which graduated plan you choose.

The 245(a) mortgage was created at a time when rates were as high as 15%, making it very difficult to reduce your principal mortgage balance. In today’s low-rate environment, many homeowners simply choose to pay a little extra each month in order to pay down their principle faster.

A graduated plan means rising payments, so it’s you’ll have to budget for the long-term. Still, if you plan to stay in your home for 30 years or more and you’re comfortable with even the highest monthly payment, this loan can be a great choice. It comes with a near-guarantee of early payoff along with the other benefits of a standard FHA mortgage.

FHA Energy Efficient Mortgage (EEM)

FHA’s energy efficient mortgage (EEM) program is a financing add-on that allows FHA borrowers to roll the cost of approved energy efficiency upgrades into their home loan.

Homebuyers commonly use this program to update their home’s windows, HVAC systems, and insulation. It’s also possible to use the FHA EEM to add solar and wind technologies to your home. If you go this route, you’ll need an energy assessment to prove that efficiency upgrades are cost effective.

Full details can be found at the FHA website.

FHA Mobile Home Loan

It is possible to use an FHA loan to finance a manufactured or mobile home. That being said, since the FHA itself doesn’t lend money, you’ll need to find a lender willing to make the loan.

The FHA imposed maximum loan amounts for mobile and manufactured homes:

  • $69,678 for a home only
  • $23,226 for a lot only
  • $92,904 for a home and lot together

An FHA mobile home loan can be used to purchase just a home, or a combination of the home and the lot. Additionally, it’s possible to place the home on a leased lot, as long as the initial lease is at least 3 years.

The max loan term for an FHA loan on a manufactured or mobile home ranges from 15-25 years, depending on a few specifics:

  • 20 years for a home or single section home and lot
  • 15 years for a manufactured home lot
  • 25 years on a multi-section manufactured home and lot

FHA Condo Loans

Many are surprised to find that they can purchase a condo using an FHA loan. Since some condo associations enforce rules regarding property sales and improvements, however, there are some restrictions when it comes to using your FHA loan for a condo.

You’ll want to look for a community that shows signs of stability, including:

  • A high percentage of owner-occupied units
  • Few, if any, non-residential square footage
  • Low restrictions on buying and selling
  • No rent-pooling agreements

The easiest way to be sure your condo will make the cut is to check out the FHA’s list of approved developments. Be aware that some associations let their approval status lapse, so it’s also a good idea to double check before putting an FHA offer on a condo property.

FHA 203(k)

Compared to other types of FHA loans, 203(k) offers unique benefits to buyers looking to revamp their new home after closing. It allows homebuyers to finance the cost of home repairs or renovations as a part of their mortgage.

The financing add-on guidelines are generous, allowing you to finance up to 110% of the anticipated post-renovation appraised value of the home.

The 203(k) program was designed to encourage neighborhood revitalization by increasing home values.

The FHA 203(k) loan can be used for a variety of renovation projects, including:

  • Kitchen and bathroom updates
  • Major systems repairs (HVAC, electric, plumbing)
  • Flooring and roofing
  • Home additions

Like a traditional FHA loan, you’ll need at least 3,5% down to get a 203(k) loan. The credit requirement is generally at least a 620, and you’ll likely need a DTI less than 43%.

One of the major benefits of the 203(k) loan is that it allows you to finance repairs at a competitive rate compared with other credit sources. If you’re itching to put some love into your new home while helping turn your neighborhood around, this might be the loan for you.

FHA Reverse Mortgage

Commonly referred to as a reverse mortgage, a home equity conversion mortgage (HECM) allows qualified homeowners to receive monthly cash disbursements by essentially liquidating the equity in their home.

The FHA HECM program can be a good option for older Americans who own their home and are looking to increase their monthly cash flow. Since HECM products reduce your home equity, the FHA sets strict requirements for these products.

To get an FHA home equity conversion mortgage, you must:

  • Be at least 62 years old
  • Own your property outright or own a considerable amount of equity
  • Live in the home most of the time
  • Take a consumer education seminar taught by a HUD approved HECM professional

In addition, property and financial qualification requirements will apply. When considering a HECM, keep in mind that along with the gradual reduction in your home equity, you’ll also pay fees and mortgage insurance premiums at closing.

While a HECM can be a good last resort, it’s wise to explore other income sources as well.

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