The FHA program offers a range of low-cost home loans with inclusive credit requirements. FHA’s minimum score requirement of 580 allows homebuyers to apply for an FHA home loan bringing as little as 3.5% down. The surprising flexibility and lower upfront costs make FHA home loans a fan favorite for first-timers. The FHA program allows buyers to purchase many different styles of homes, including condos and existing fixer-uppers. Loan qualification guidelines are fairly similar across the various types of FHA loans available:
- Fixed Rate Loans
- Adjustable Rate Loans
- FHA 245(a) Loan
- FHA Energy Efficient Mortgage
- FHA Loans for Mobile Homes
- FHA Loans for Condos
- FHA 203(k)
- FHA Reverse Mortgage (HECM)
Key Benefits of Using the FHA Loan
- Lowest down payment option available
- Inclusive income and asset requirements
- Flexible credit requirements lender to lender
- Competitive rates
- Property inclusive
- Unique loan program for financing fixer-uppers
Fixed Rate FHA Loan
Available in fixed rate terms between 15 and 30 years, FHA mortgages come with a low down payment advantage- one of the lowest on the market. Rates are competitive and credit qualifications vary between lenders. Most lenders today require a minimum credit score of 620 to 640. If applying for FHA financing with 580 credit, some lenders may advise improving credit scores as well if timeline is not a factor. Improved credit scores typically will give room for savings overall and lower interest rates.
FHA financing is property inclusive as well making homeownership more attainable:
- Manufactured and Mobile Homes
- Townhomes and Condos
- Multi-unit (up to 4 units)
The standard FHA loan is a great product that has helped open the door to homeownership for many, but only one FHA mortgage can be financed at a time. 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 or refinance later to a different loan type such as conventional.
Adjustable Rate FHA Loan
An FHA adjustable rate mortgage (ARM) comes with an interest rate that “adjusts” over the loan's term; generally increasing. Many people are drawn to ARM mortgages because they offer initial rates significantly lower than a fixed-rate product.
There are several term options to consider when choosing an FHA ARM:
- 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, or if you anticipate pay increases that will allow you to afford your mortgage at a higher rate.
Adjustable rate mortgages fell out of favor after 2007, but are slowly regaining popularity. Still, proceed with caution when considering an adjustable rate home loan. Rates increase according to market activity, meaning your monthly ARM payment will be unpredictable.
Section 245(a) Graduated Payment Mortgage
An FHA 245(a) loan packs a fixed rate graduated payment mortgage, also known as a “growing equity mortgage.” Graduated payment mortgages structure your monthly payment to scheduled increases over the life of your loan. As your loan amortizes, you’ll reach a point in time when your equity starts gaining traction.
These mortgages are set up in 30-year terms, but it’s not uncommon to pay off the loan early depending on which graduated plan you choose.
The 245(a) mortgage was created 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 to pay down their principal faster. A graduated plan comes with scheduled payment increases, so you will need 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)
The FHA 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. Solar and wind technologies also apply. If you go this route, you’ll need an energy assessment performed to prove that efficiency upgrades are cost-effective.
FHA Mobile Home Loan
It is possible to use an FHA loan to finance a manufactured or mobile home, but finding a lender willing to approve financing may take a few tries. Manufactured and mobile homes are viewed as personal property and often come with higher insurance rates, making them riskier investments for lenders.
Manufactured and mobile homes purchases are restricted to the following maximum loan amounts:
- $69,678 for a home only
- $23,226 for a lot only
- $92,904 for a home and lot together
This FHA loan type can be used to purchase just a home, or home and lot. If only the home is purchased at first, the home can be placed 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 the 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 such as:
- A high percentage of owner-occupied units
- Minimal, if any, non-residential square footage
- Fewer 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 the current list before putting an FHA offer on a condo property.
Compared to other types of FHA products, 203(k) loans offer the opportunity for buyers to purchase fixer-uppers while financing additional funds for home repairs and renovations into the mortgage. The financing add-on guidelines allow financing for up to 110% of the anticipated post-renovation appraised value of the home. The program was designed to be inclusive of renovation projects. This keeps options open for the ambitious fixer-upper, but also fosters maintenance and improvement of local neighborhoods as well.
- Kitchen and bathroom updates
- Major systems repairs (HVAC, electric, plumbing)
- Flooring and roofing
- Home additions
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 (FHA HECM Program)
Most have heard or seen advertisements on TV for reverse mortgages. Reverse mortgages are used as a home equity conversion mortgage (HECM). This allows qualified homeowners to receive monthly cash disbursements by liquidating the equity they’ve built up in their home.
The FHA HECM program can be an attractive option for older Americans who already own their home and are looking to increase their monthly cash flow. Since HECMs reduces your home equity, the FHA sets strict requirements for their FHA HECM program.
If considering an FHA home equity conversion mortgage, you must:
- Be at least 62 years old
- Own your property outright or a significant amount of equity
- Live in the home majority of the time
- Complete a consumer education course led by a HUD-approved HECM professional
Property and financial qualification requirements also will apply. Keep in mind that along with the gradual reduction in your home equity, you’ll also be responsible for fees and mortgage insurance premiums upfront at closing. While a HECM can be a good last resort, it’s wise to explore other income sources as well.