There are many different home loan choices if you want to purchase a residence. One of the best options for first-time and lower-income buyers is an FHA loan. It requires as little as 3.5% down.
Take a closer look at how FHA loans work, their pros and cons, the different types of FHA loans available, and how to apply.
The Federal Housing Administration (FHA) offers several types of mortgage loans to help make homeownership accessible and affordable for buyers FHA loans require lower down payments and credit scores compared to conventional loans. If you’re considering an FHA loan, it’s helpful to understand the most common types available
Basic Home Mortgage 203(b)
The FHA 203(b) loan is the most popular and commonly used FHA mortgage. It can be used to purchase a primary residence such as a single-family home townhouse condo or even a multifamily home with up to four units.
With a 203(b) loan, you can finance up to 96.5% of the home’s purchase price. So if you buy a $200,000 home, your minimum down payment would be just 3.5% or $7,000. The remaining $193,000 would come from your FHA loan.
To qualify for the lowest down payment on a 203(b) loan, you’ll need a minimum credit score of 580. With a score between 500-579, your down payment increases to at least 10%.
The 203(b) offers flexible credit guidelines, low down payments and is available for homes that meet FHA safety and appraisal standards. It’s a great option if you want to buy a move-in ready home but have limited funds for a down payment.
FHA Energy Efficient Mortgage
Homebuyers who want to purchase an energy-efficient home or make upgrades to an existing home should look into the FHA Energy Efficient Mortgage (EEM). This loan lets you fold the cost of energy-efficient upgrades into your mortgage.
Upgrades could include adding insulation, installing solar panels or replacing windows and doors with energy-efficient models. To qualify, a home energy rater will need to inspect your home before and after improvements to ensure the work enhances efficiency.
The EEM can be combined with a 203(b) or other FHA mortgage. You can borrow up to $8,000 or 5% of the home’s value, whichever is greater, to make the improvements. This stretch loan makes energy-efficient homes more affordable.
203(k) Rehab Mortgage
FHA’s 203(k) mortgage lets buyers purchase and renovate a home with just one loan. It offers flexible financing for homes needing significant repairs or renovation. The 203(k) allows you to roll the purchase price and cost of repairs, up to $35,000, into your mortgage.
To start, you’ll work with a 203(k) consultant to create a detailed rehab plan with cost estimates. Repairs like structural repairs, upgrades to plumbing and electric, and general property improvements are eligible with a 203(k) loan.
You can borrow up to 96.5% of the home’s future value, including renovation costs. So if you buy a $100,000 home needing $20,000 in repairs, your total 203(k) loan would be $116,500 with just a 3.5% down payment.
Mortgage Insurance for Disaster Victims Section 203(h)
The Section 203(h) program offers mortgage insurance to disaster victims in federally declared disaster areas. It allows flexible credit and underwriting guidelines to help victims rebuild and purchase a new home.
For example, 203(h) loans don’t require a down payment or minimum credit score. Income verification rules are also relaxed after a disaster. Missed mortgage payments related to the disaster also won’t count against your credit profile.
In addition to looser eligibility standards, 203(h) offers loan limits up to $317,000. It provides much-needed aid so victims can begin rebuilding their lives and communities faster.
Good Neighbor Next Door
The Good Neighbor Next Door (GNND) program incentivizes law enforcement officers, teachers, firefighters and emergency medical technicians to buy and live in underserved communities.
In exchange for purchasing a home in a revitalization area and living there for 36 months, GNND participants receive a substantial 50% discount off the list price of HUD-owned homes. For example, if the list price is $200,000, your purchase price would be just $100,000.
GNND buyers can finance their discounted purchase with an FHA, VA or conventional mortgage. Participants don’t need a down payment but must pay closing costs. This creative program allows eligible homebuyers to purchase a substantially discounted home.
Finding the Right FHA Loan
The FHA offers several mortgage programs to help buyers overcome obstacles like small down payments, lower credit, and needed renovations. Government backing makes FHA loans more accessible for underserved communities.
Consider your budget, home needs, and eligibility for programs like Good Neighbor Next Door. Then explore FHA options with a qualified lender. The right FHA loan can be the difference that makes your dream of homeownership a reality.
How to apply for an FHA loan
You can apply for an FHA loan through any lender that is specifically authorized to originate FHA loans. These are called “FHA-approved lenders.”
“It’s best to work with an experienced mortgage professional who can help you determine the best FHA loan program to fit your needs based on a careful evaluation of your unique financial situation. This person can guide you through the process of how and when to apply for an FHA loan,” Slade recommends.
FHA energy-efficient mortgage loan
Per the US Department of Housing and Urban Development, the FHA’s Energy Efficient Mortgage program (EEM) can help you save money on your utility bills by enabling you to finance energy-efficient improvements with your FHA-insured mortgage. The EEM program recognizes that an energy-efficient home will have lower operating costs, making it more affordable for homeowners.
The maximum amount of the energy package that can be added to your regular FHA loan amount is the lesser of cost-effective improvements to be made (energy package) based on the home energy assessment; or the lesser of 5% of the adjusted value, 115% of the median area price of a single-family dwelling, or 150% of the national conforming mortgage limit.
FHA Loan vs. Conventional Loans (Mortgage): The Pros and Cons Before You Choose | NerdWallet
FAQ
How many different types of FHA loans are there?
|
The 5 Types of FHA Loan
|
|
|
FHA LOAN TYPE
|
WHAT IT IS
|
|
203(k) Mortgage Program
|
A mortgage that includes extra funds to cover the cost of repairs, renovations, and home improvements.
|
|
Energy Efficient Mortgage Program
|
A mortgage that includes extra funds to pay for energy-efficient home improvements.
|
What is the most common FHA loan?
What is an FHA 203k loan?
Is it better to use FHA or conventional?
What is an FHA loan?
An FHA loan is a type of mortgage that is popular with first-time buyers. FHA loans are government-backed and insured by the Federal Housing Administration. Because the program protects the lender if borrowers default on the loan, qualification criteria like credit score and down payment are lower than other loan types such as a conventional loan.
What are the different types of home loan options?
There are many different home loan choices if you want to purchase a residence. One of the best options for first-time and lower-income buyers is an FHA loan. It requires as little as 3.5% down. Take a closer look at how FHA loans work, their pros and cons, the different types of FHA loans available, and how to apply.
Is an FHA loan backed by the government?
An FHA loan is backed by the government and insured by the Federal Housing Administration. However, it is issued and underwritten by private lenders who participate in this loan program. Conventional loans are provided and underwritten by private-sector lenders, including banks, credit unions, and other lenders.
What is a Federal Housing Administration (FHA) loan?
A Federal Housing Administration (FHA) loan is a home mortgage that is insured by the government and issued by a bank or other lender that is approved by the agency. FHA loans require a lower minimum down payment than many conventional loans, and applicants may have lower credit scores than is usually required.