If you want to buy a home, but you have limited savings or a lower credit score, you may be interested in what an FHA loan has to offer. The Federal Housing Administration, a division of the US Department of Housing and Urban Development (HUD), insures FHA home loans for first-time buyers and those with less-than-ideal finances. These loans require a minimum down payment of just 3.5% and a credit score of only 580. You may even qualify if your score is as low as 500, provided that you put down at least 10%.
You may have heard that FHA mortgage requirements are more stringent than conventional loans, but it may surprise you to learn just how flexible your housing options are. Here’s a closer look at the types of homes you can buy with an FHA loan and what could prevent a home from being FHA-approved.
Buying a home is an exciting milestone in life. But securing financing can be stressful especially for first-time homebuyers. That’s where FHA loans come in. These government-backed mortgages require just a 3.5% down payment and have flexible credit requirements. But there are specific rules about the types of homes you can purchase with FHA financing. Read on to learn all about FHA loan approved homes.
What Does “FHA-Approved” Mean?
When a home is “FHA-approved,” it means it meets the standards set by the Federal Housing Administration (FHA) to be purchased with an FHA mortgage. The Department of Housing and Urban Development (HUD) oversees these loans and wants to ensure borrowers invest in quality homes.
So FHA guidelines enforce strict property requirements. An FHA-approved house must be:
- Structurally sound
- Safe
- Sanitary
- Located in an acceptable area
Essentially, the home must be livable and have the potential to appreciate over time These high habitability standards ensure homeowners can enjoy their investment for years to come.
Why Homes Don’t Get FHA Approval
While FHA requirements have relaxed over the years, some homes still don’t qualify. Here are the main reasons a property might not be FHA-approved
1. Defective Construction
The FHA wants borrowers to invest in quality homes built to last. So properties with:
- Leaky roofs
- Broken stairs
- Warped floors
- Exposed wires
And other structural flaws won’t get approved. Repairs may be possible, but they can be costly and take time.
2. Prohibited Locations
The FHA also prohibits certain property locations, like:
- Near airports, railroads, or busy roads (excessive noise)
- Next to commercial properties
- Close to high voltage power lines
- On unsafe soils like sinkholes or landfills
Unless the seller can mitigate these environmental hazards, FHA approval is unlikely.
3. Health and Safety Issues
Homes with conditions hazardous to health and safety are disqualified. These include:
- Lead-based paint
- Asbestos
- Faulty plumbing or heating
- Mold
- Pest infestations
- Contaminated drinking water
Remediating these threats is usually expensive and lengthy.
4. Inadequate Facilities
Finally, the FHA requires homes to have complete amenities and utilities. Dwellings without:
- Hot and cold running water
- Adequate heat
- Electricity
- Private entrances
- Proper driveway access
Won’t get approved. Making upgrades may not be feasible either.
How to Find FHA-Approved Listings
Clearly, not every house on the market will qualify for FHA financing. So how do you locate approved properties?
Work with an experienced real estate agent. FHA rules can be complex, but a knowledgeable agent stays up-to-date on the latest requirements. They can also quickly identify any red flags during showings.
Search on sites like Redfin. Many listings specify if a home is “FHA approved.” You can filter search results accordingly. But double check with an agent, as this detail is sometimes inaccurate.
Look for newer homes. New construction is more likely to meet FHA structural standards. Avoid old fixer-uppers unless you can pay cash.
Consider condos carefully. Entire condo complexes must get FHA approval. Individual units that are otherwise eligible may be disqualified if the HOA is not certified.
Act fast if you find an approved home. Competition is fierce in today’s market. An FHA-approved property in a hot area won’t last long!
The FHA Appraisal Process
Once you’ve located an FHA property and made an offer, the lender will order an FHA appraisal. This mandatory evaluation is more rigorous than a conventional inspection.
The goal is confirming the home meets HUD’s minimum property standards. Key elements include:
- Documenting sound structural integrity
- Testing major systems like plumbing and electricity
- Checking for health/safety hazards like lead and radon
- Ensuring compliance with local building codes
- Evaluating the home’s neighborhoods and location
If defects are found, repairs may be required to gain approval. But extensive issues could still result in a rejection. Also note appraisals are valid for just 120 days. So try to close quickly before re-inspection is needed.
Tips for Buying an FHA Home
Navigating FHA guidelines takes diligence and preparation. Here are tips to smooth the process:
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Get pre-approved for financing. Work with a lender to confirm your budget and loan eligibility.
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Ask sellers if the home is FHA-approved. Do this early before investing time touring ineligible properties.
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Review the appraisal carefully. Ensure identified repairs are completed properly by the close of escrow.
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Include an FHA contingency. This gives you an out if the appraisal turns up undiscovered major flaws.
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Buy home warranty protection. This coverage helps pay for repairs to broken systems like HVAC units.
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Consider FHA streamline refinancing later. You can tap equity without another appraisal if you make few upgrades.
Enjoy the Benefits of FHA Homeownership
Although purchasing an FHA property takes effort, the rewards are plentiful. Low down payments help first-time buyers overcome the biggest hurdle to entering the market.
FHA-approved homes also offer peace of mind. Buyers can rest easy knowing their investment meets HUD’s stringent quality guidelines. So while the search process may be more challenging, owning an FHA home is well worth it.
Why a Home Might Not be FHA-Approved
While there is more leniency with FHA loans than you might have realized, certain restrictions still apply. Here are the most common scenarios that disqualify a home for an FHA loan.
Types of Homes that Qualify for FHA Loans
You can use an FHA mortgage to buy a variety of property types. While single-family homes are the most common, they are far from your only option. Here are the other types of homes that are eligible for FHA loans.
A manufactured home is a factory-built home that arrives onsite fully constructed and ready to be installed. The house is only meant to be moved once, which differs from a mobile home that can be relocated multiple times if necessary.
FHA manufactured home loans may require a slightly higher credit score than other FHA-approved properties. Eligible homes must be built on or after June 15, 1976, and meet local and state guidelines. Minimum square footage requirements may also apply, and the home must be installed on a permanent foundation.
Failure to meet minimum property standards could disqualify a fixer-upper from an ordinary FHA loan. However, if the home you want to buy needs major renovations, you can apply for an FHA 203(k) rehabilitation mortgage. Be aware that the house must still meet basic structural and energy efficiency standards to qualify.
An FHA 203(k) loan allows you to buy and renovate the home you want. It’s also available as a refinance loan for the home you currently live in. Once you have completed the necessary repairs, an appraiser will reassess the home’s suitability to make sure it meets the minimum property standards.
While you can’t buy an investment property with an FHA loan, a mixed-use property may be eligible as long as it’s primarily zoned residential and you intend to use at least 51% of it as your primary residence. The remainder of the property can be used for other purposes, such as renting it out to generate extra income.
Certain duplexes and condominium buildings with up to four units are eligible for FHA loans. Check HUD’s list of approved projects to see if the property you want to buy has met the FHA’s minimum property eligibility requirements.
Purchasing a condo building is your chance to make extra money by renting out part of the property. Just be aware that you need to live in one of the units you purchase for the building to be FHA-approved. Other unique requirements also apply to FHA condo loans.
FHA loans are often thought of as first-time homebuyer loans, but you may be eligible to buy a second FHA-insured home under the right circumstances. The qualifications, outlined in HUD 4000.1, include the following:
- Your job requires you to relocate.
- The property no longer meets your family’s needs.
- The loan-to-value ratio on your current home is 75% or less.
- You co-signed an FHA loan for a home you don’t live in.
- You got divorced and no longer live in the FHA-insured home.
How To Buy Your First House With An FHA Loan *Step By Step Breakdown*
FAQ
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