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FHA Loan Program

Complete Guide to the FHA Loan

In this comprehensive guide to Federal Housing Administration loans, or FHA loans, we will cover:

Section 1 What is an FHA Loan?

An FHA loan is a mortgage loan option for U.S. home buyers. It is guaranteed by the Federal Housing Administration, an agency of the Department of Housing and Urban Development, and issued by FHA-approved lenders across the country.

FHA loans are are well known for their affordability – namely their 3.5% percent down payment and relatively lenient credit requirements. The FHA has insured more than 47 million mortgage loans since its inception in 1934.

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Section 2 FHA Loan Types

There are more than a dozen FHA mortgage programs, with each varying slightly in structure and use. The most common FHA loan types are:

Fixed-Rate FHA Loan

Fixed-rate mortgages are the most common type of FHA loan, as they offer a reliable, consistent payment that homeowners can count on. These typically come in 15- and 30-year terms and have the same interest rate for the entirety of that term. While the government fully backs the loan, lenders set their own interest rates.


Adjustable Rate Mortgage (ARM)

Adjustable-rate FHA loans have interest rates that vary over time. They may have a period of 3, 5 or 7 years in which the initial low rate is fixed, but after that period lapses, the rate can rise. This means your mortgage payment would rise as well.

FHA Energy Efficient Mortgage (EEM)

FHA Energy Efficient Mortgages, or EEMs, encourage homeowners to make energy-efficient upgrades on their properties. The loans can be used to cover the costs of acceptable energy-related improvements on an existing home or a new home you’re purchasing.

Other FHA Loan Types

There are other, less-used FHA loan types as well, including the 203(k) – a mortgage generally reserved for fixed-uppers. The FHA 203(k) loan allows you to roll the costs of your repair and renovation expenses into your mortgage, which is based on the expected higher value of the property after those improvements are made.

There are also streamline refinance FHA loans, which offer existing FHA borrowers a quick and easy refinancing process, as well as Title 1 FHA loans that cover home improvements and repairs.

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Section 3 FHA Loan Eligibility

Your FHA loan eligibility depends on your credit score, income, debts, home price and the size of your down payment, as well as various other factors.

General FHA Loan Requirements

To qualify for an FHA loan, you’ll need sufficient credit and income to show lenders you have an ability and willingness to repay the debt.

You also must:

  • Have a valid Social Security number
  • Be a lawful U.S. resident
  • Make a down payment of at least 3.5 percent
  • Intend to use the property as your primary residence
  • Have an appraisal performed on the property by an approved appraiser

FHA Loan Credit Requirements

To take advantage of the FHA loan’s 3.5 percent down payment, you’ll need a credit score of at least 580. Borrowers with credit scores below 580 may be able to qualify with a 10 percent down payment. But it’s also important to understand that FHA lenders can have credit score minimums that exceed what the government requires.

If you’ve filed for bankruptcy, you’ll need to be at least two years removed from the filing and have since established good credit. If you’ve experienced a foreclosure, you must be three years removed for the foreclosure.

Guidelines and policies on credit can vary by lender.

MORE: Take a closer look at FHA credit requirements here.

FHA Loan Debt & Income Requirements

Lenders will look at the relationship between your gross monthly income and your major monthly debts when evaluating your loan file. Guidelines and restrictions on debt-to-income (DTI) ratio can vary by lender and other factors.

Some lenders may have lower thresholds than others, and borrowers with more challenging loan files can encounter more restrictive DTI guidelines.

Unlike USDA loans, FHA loans do not have restrictions on how much income borrowers can make.

FHA Loan Property Requirements

In order to protect homeowners as well as their financial investment, the FHA also sets requirements for what types of properties can be financed with FHA funding. To determine if your home meets these minimum requirements, your lender will order an appraisal of the property.

The appraiser will evaluate the condition of:

  • Each area and room on the property, including any attics or basements
  • All mechanical systems
  • Appliances
  • Plumbing
  • Foundation
  • Roof
  • Gutters

They’ll specifically be looking for signs of damage, deferred maintenance or deterioration. Normal wear and tear will be noted, but as long as a property appears well-maintained, it should qualify for FHA financing.

The main goals of the FHA appraisal: 1) Ensure the home is a healthy, safe and structurally sound building to live in and 2) Make sure the actual value of the home matches or exceeds the purchase price.

In the event the home doesn’t pass appraisal or repairs are required, the seller will need to make the repairs. If the home doesn’t appraise for at least the purchase price, buyers can talk with the seller about renegotiating in light of the low valuation.

MORE: Complete guide to the FHA loan appraisal process.

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Section 4 FHA Loan Benefits

Thanks to their relaxed credit and debt-to-income requirements, FHA loans are largely considered one of the easiest mortgage products to qualify for. They also require minimal down payments, making them ideal for borrowers without a lot of savings.

Relaxed Credit Score Requirements

FHA loans come with low credit score requirements when compared to other loan options, requiring a minimum of just 500. Typically, conventional loans requires a score of 620, while USDA loans require a 600 or higher.

Credit score benchmarks for FHA loans will vary lender.

Low Down Payment

One of the biggest benefits of the FHA loan is its low down payment requirements. If you have a 580 credit score or higher, you can put down just 3.5 percent, compared to the typical 5 percent you’ll need for conventional financing.

FHA loans also allow you to use qualified gift funds toward your down payment or closing costs. Talk with lenders about their policies and required documentation regarding gift funds.

Many Home Types are Eligible

FHA loans can be used on a variety of property types, including single-family homes, condo units, duplexes, manufactured housing and mobile homes.


First-Time Homebuyers

The FHA loan is particularly popular with first-time homebuyers, largely because of its low down payment requirements. Their more lenient credit standards are also helpful to first-timers, who many times are lacking a robust credit history.

Other loan types may prove more difficult for new homebuyers, simply due to more stringent credit, income and down payment requirements. Many first-time buyers don’t have deep savings accounts or the ability to make a sizable down payment. FHA loans offer an affordable, hassle-free route toward homeownership for these cash-strapped buyers.

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Section 5 FHA Loan Rates

While this is a government-backed loan, there is not a set interest rate for FHA loans. FHA lenders set and quote their own interest rates. Rates can vary depending on the lender, the loan type, the borrower’s credit score and more.

Fixed interest rates on FHA loans tend to be slightly lower than those on conventional mortgage programs, simply because lenders have more protection. They have the added insurance of FHA’s backing, which allows them to take extra risk and offer lower rates.

MORE: The complete guide to FHA loan rates

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Section 6 FHA Loans and Mortgage Insurance

In order to allow for such low down payments and credit scores, the FHA does require you pay a Mortgage Insurance Premium (MIP) to protect the agency in case you default. You’ll pay this once as an upfront fee at closing and then again month after month, along with your mortgage payment.

Upfront MIP

This is a one-time MIP payment you’ll make at closing. It costs 1.75 percent of your total home loan balance (not the home’s price), regardless of your credit score or debt-to-income ratio.

Annual MIP

Your annual MIP payments will be calculated every year and built into your monthly mortgage payments. The total of these payments will depend on your loan-to-value ratio, your loan balance and your loan’s term.

Loan Term Loan Amount LTV Ratio Annual Insurance Premium
Over 15 years $625,000 or less 95 percent or less 0.80 percent
Over 15 years $625,000 or less Over 95 percent 0.85 percent
Over 15 years Over $625,000 95 percent or less 1 percent
Over 15 years Over $625,000 Over 95 percent 1.05 percent
15 years or less $625,000 or less 90 percent or less 0.45 percent
15 years or less $625,000 or less Over 90 percent 0.70 percent
15 years or less Over $625,000 90 percent or less 0.70 percent
15 years or less Over $625,000 Over 90 percent 0.95 percent

Here’s an example: If you had a 30-year loan of $200,000 and an loan-to-value ratio of 90 percent, your annual MIP would be $1,600. Spread out over 12 months, that would mean about $133 paid in MIP every month.

Paying the Annual MIP

You may not have to pay your annual MIP forever. Depending on your loan term, your loan-to-value ratio and when your loan was originated, you may be able to cancel your MIP and subsequently lower your monthly payment.

For loans originated before June 3, 2013, MIP durations are as follows:

Term Original Down Payment Duration
15 years or less 22 percent or higher No annual MIP
15 years or less less than 22 percent Cancelled at 78 percent LTV
Over 15 years 22 percent or higher 5 years
Over 15 years less than 22 percent Cancelled at 78 percent LTV (5 years minimum)

On FHA loans originated after June 3, 2013, annual MIP durations look like this:

Loan Term Original Down Payment Duration
15 years or less less than 10 percent Life of loan
15 years or less 10 percent or higher 11 years
Over 15 years less than 10 percent Life of loan
Over 15 years 10 percent or higher 11 years
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Section 7 FHA Loan Limits

Limits on FHA loans vary by location and property type. They amount to 115 percent of the county’s median home price, so they fluctuate every year as the local market changes. You can find your FHA loan limits using this tool at HUD.gov.

FHA lenders also offers jumbo loans, meaning loans in excess of the FHA limit for your area. For jumbo FHA loans, lenders may have tighter guidelines for minimum credit score, credit history, DTI ratio and more.

MORE: Check your FHA loan limit here

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Section 8 FHA Loan Closing Costs

All mortgage loans come with certain closing costs, which can vary from lender to lender. On FHA loans, closing costs tend to equal around 2 to 5 percent of the total loan amount. Just a few of the closing costs you may need to pay on your FHA loan include an origination fee, survey, appraisal, underwriting fee and more.

As the buyer, you are responsible for covering closing costs, but with an FHA loan, you can ask the seller to contribute a portion of them. These are called concessions, and sellers can put up to 6 percent of the home’s total sales price toward your closing costs. Sellers cannot contribute toward your down payment requirement.

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Section 9 FHA Loan Refinancing

If you already have a home loan, you can opt to use an FHA mortgage when refinancing your existing loan. You might do this if mortgage rates fall below your current loan’s rate or if the fixed period of your adjustable-rate loan is ending.

FHA Streamline Refinance

If you have an FHA loan and want to refinance to a new one, it's called a streamline refinance. To qualify, you need to have made at least six payments on your current loan and your closing date must be at least 210 days past.

Conventional to FHA

If you have a conventional loan, refinancing to an FHA mortgage can have big benefits. You can refinance up to 96.5 percent of your current home value using an FHA refinance.


Net Tangible Benefit

In order to refinance an existing FHA loan, you need to see “net tangible benefit” from the transaction. This simply means that the refinance improves your financial position in one of the following ways:

  • The principal loan balance and interest is reduced by at least 5 percent.
  • The new adjustable rate is 2 percent lower than your current fixed rate.
  • The new fixed rate is less than 2 percent higher than your current adjustable rate.
  • The term of the loan has been reduced.

Cash-Out Refinance

If you've owned your home for a while and need to pay for home repairs, college tuition, debts or just need extra funds, then a cash-out FHA refinance offers a solution. Using these loans, qualified buyers can look to refinance up to 85 percent of the home's value.

MORE: See all FHA refinancing options here

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Section 10 How to Apply for an FHA Loan

The first step is to find a lender approved by the FHA. You can use HUD’s Lender List Search tool to find one in your area.

Then, you’ll need to:

  • Talk with a loan specialist about getting preapproved. This will tell you if you meet the minimum eligibility requirements for an FHA loan and the maximum loan you can apply for.
  • Find your property and sign a purchase agreement with the seller.
  • Finalize your loan application with your lender.
  • Await your appraisal. The lender will order an appraisal of the property to ensure it meets FHA standards.
  • Wait as your loan is underwritten and processed by the lender.
  • Attend closing, This is when you’ll sign your papers, pay your closing costs and get your keys.
  • Move into your new home!

Make sure you stay in touch with your loan officer throughout the process, as they may need additional documentation along the way. The more responsive you are, the better. Any missing paperwork would delay your closing and your move onto the property.

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