The Different Types of FHA Loans

Did you even know there are many types of FHA loans? Very few people do. But the Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD), exists to help many sorts of actual and would-be homeowners, so it makes sense for it to offer a range of programs to help different groups.

Common Characteristics

All FHA loans have some things in common. For example, they are always sourced through private lenders, and the federal government doesn't provide any money itself. Instead it guarantees a big part of the debt so those private companies have lower risks when they lend to consumers who otherwise might not qualify for the borrowing they need. As a result, borrowers are required to find a down payment that can be as low as 3.5 percent of the home's purchase price, and they may not have to be as creditworthy as others: They'll still need a reasonable credit score, but not necessarily a great one.

Inevitably, there's a catch, though it's one many are happy to live with. The cost of insuring your loan is generally higher than with "conventional mortgages" (the term used for home loans that aren't backed by the government), and you can expect to pay higher mortgage insurance premiums (MIPs) each month. Government-guaranteed mortgages are not available on highly priced homes, and you can see the cap in your area using an online tool on HUD's website.

Fixed-Rate Mortgages

These fixed-rate mortgages (FRMs) are by far the most common loans from the FHA. You can borrow over a set 10–, 15–, 20–, 25– or 30–year term to buy or refinance a 1– to 4–unit property.

As the name implies, the interest rate charged won't change, so your first payment should be the same as your last, which you might make 30 years later.

Adjustable-Rate Mortgages

When it comes to term options and the types of property they can be used for, these adjustable-rate mortgages (ARMs) are the same as FRMs. However, and again as the name implies, there's one big difference: your rate can – and almost certainly will – change. Right now, it looks highly likely that any such change is going to be upward.

Nearly all ARMs are so-called hybrid ARMs, meaning there's an initial period during which the rate is fixed, after which it floats. Once it's floating, it can be changed at regular fixed intervals. For example, a 5/1 ARM has a fixed rate for the first five years, and then can move up or down one time each year. Most ARMs have caps that limit how far the rate can change both at any one time and throughout the lifetime of the loan.

People like these because, everything else being equal, they come with lower initial rates. That makes them especially attractive to those who expect to move homes again within five or seven years or however long the initial fixed rate lasts.

Reverse Mortgages

The FHA calls its version of the reverse mortgage the Home Equity Conversion Mortgage (HECM). These are available only to those age 62 years or above who either own their homes outright or have low mortgage balances.

You may be able to borrow against you principal residence, and make absolutely no monthly payments ever – though you have to keep the home in good repair and make property tax and insurance payments. The principal (the amount borrowed) and all the interest that accumulates on it are rolled up, and only fall due when you sell your home or die.

You can take your borrowing in various combinations of:

  • Equal monthly payments for the rest of your life
  • Equal monthly payments for an agreed period
  • A line of credit, though there are caps on the size of some lump sum withdrawals

To learn more, see How a Reverse Mortgage Works

Section 245(a) Loans

Section 245(a) of the National Housing Act allows HUD to assist home buyers who are currently on limited incomes but who have good prospects. That might include newly qualified professionals and others setting out on their careers who can reasonably expect their salaries and other income to rise substantially in the following five to ten years.

The FHA Graduated Payment Mortgage (GPM) allows borrowers to pay less each month than they normally would during the early years of their mortgages' lifetimes. The difference is added to the principal, and payments rise in accordance with a pre-agreed schedule, which varies depending on which of the five available plans the borrower has chosen. Obviously, borrowers end up with higher monthly payments than those with traditional FRMs as they eventually begin to pay down the deferred debt and its interest – unless, that is, their home appreciates in value and they refinance before the higher payments kick in.

The FHA's Growing Equity Mortgage (GEM) is another Section 245(a) loan, and is similar to the GPM. However, this one lets a borrower reduce the term of the loan by applying scheduled increases in monthly payments to the outstanding principal balance. If that sounds good to you, be prepared to act quickly: HUD's talking about scrapping GEMs.

Energy Efficient Mortgage Program

Because those with energy efficient homes have lower utility bills, they can afford to make higher mortgage payments. That's the thinking behind the FHA's Energy Efficient Mortgage Program, which provides funding for eligible improvements, even if your income doesn't qualify you for the additional money. Better yet, you don't have to make a down payment on the cost of those improvements.

To qualify, the energy efficiency improvements you make must be cost-effective, and that may have to be checked on site by an energy consultant.

Other Types of FHA Loans

A list of sorts of loans the FHA offers seems endless. But three other popular ones include those for:

  • Mobile homes – Under the Manufactured Housing Program, there are two types of loans: one for those who own the land on which their homes are located, and another for those who don't.
  • Condominiums – These are widely available, but the home must be within an FHA-approved condominium project.
  • Refurbishment projects – When you want a single loan to purchase and refurbish a home. (See Understanding the Qualifications and Drawbacks of FHA 203K Loans.)

If it carries on like this, the FHA could end up rivaling Baskin-Robbins when it comes to flavors.

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