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FHA FAQ: Frequently Asked Questions About FHA Loans

FHA FAQ answers

The FHA loan program provides a fantastic opportunity for people who want to purchase a home but either don’t have stellar credit or don’t have enough money for a sizeable down payment.

Here are answers to some of the most common questions about FHA loans, how they work and how to qualify.

What is an FHA loan?

An FHA loan is a mortgage that is backed by the Federal Housing Administration (FHA), a part of the Department of Housing and Urban Development (HUD) within the federal government.

Because the FHA guarantees these mortgages and reimburses lenders if the borrower defaults, lenders can make FHA loans to borrowers with lower down payments and looser credit requirements than conventional loans. This can make it easier to qualify for a mortgage.

Is the FHA my lender?

No. FHA loans are made through FHA-approved private lenders, so the FHA itself is not your lender. The FHA simply guarantees the loan, which means that they will reimburse the lender for any loans on which the borrower defaults.

Are FHA loans only for first-time homebuyers?

No. FHA loans are available to all homebuyers as long as they meet the other criteria.

Is there a catch with FHA loans?

The big catch with FHA loans is that you have to pay for two types of mortgage insurance:

  • An upfront mortgage insurance premium equal to 1.75% of your loan amount.
  • An annual mortgage insurance premium, paid monthly, that ranges from 0.45% to 1.05%, depending on the length and size of your loan.

The upfront mortgage insurance premium can either be paid in full with cash or financed into the loan.

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Can you get rid of mortgage insurance on FHA loans?

If you put less than 10% down out an FHA loan, you have to continue paying for mortgage insurance for the entire life of the loan. If you put 10% or more down, your mortgage insurance payments will stop after 11 years.

In order to remove the cost of mortgage insurance sooner, many people refinance their FHA loan into a conventional mortgage once they have enough equity in their home to avoid PMI.

What are the requirements for an FHA loan?

There are a number of requirements that have to be met in order to secure an FHA loan, all of which are laid out in detail in the FHA Single Family Housing Policy Handbook. Some of the major requirements include:

  • A minimum 3.5% down payment with a credit score of 580 or above, or a minimum 10% down payment with a credit score of 500-579.
  • Proof of employment and sufficient income.
  • A maximum debt-to-income ratio of 43%, with some exceptions.
  • The property must meet the HUD’s minimum safety standards.
  • Submission of the Uniform Residential Loan Application.

How much can I borrow with an FHA loan?

The maximum amount you can borrow through an FHA loan depends on where you live and the type of property you are buying.

You can click here to find the loan limit for your county, but the maximum loan amount on single-unit properties ranges from $314,827 in the lowest-cost areas of the country to $727,525 in the highest-cost areas. For four-unit properties, the maximum loan amount ranges from $605,525 to $1,397,400.

All reverse mortgages taken out through the Home Equity Conversion Mortgage (HECM) program are subject to the same $726,525 limit, no matter where you live.

Can I buy a second home or investment property with an FHA loan?

You can purchase a second home with an FHA loan, but only with substantial documentation that you meet a strict set of requirements. Those requirements include the lack of any other second homes, verification that it will not be used as a vacation home and proof that the commute to work from your primary home is an undue hardship and that there are not affordable rental opportunities within 100 miles of your workplace.

FHA loans are not allowed for investment properties. However, you can take out an FHA loan on certain 2-4 unit properties, so it is possible to rent out some of the units on your property.

What are the different kinds of FHA loans?

There are several different types of FHA loans available, including:

  • Fixed-rate or adjustable-rate loans
  • Reverse mortgages through the HECM program
  • Section 245(a) loans, with monthly payments that start small and increase over time, which can be helpful for people who expect their income to rise
  • The Energy Efficient Mortgage program (EEM), which finances home improvements that improve your home’s energy efficiency
  • 203(k) loans, which help you rehabilitate a property by financing the cost of repairs and improvements

Can I have a cosigner?

Yes, you can have a cosigner on an FHA loan. Any cosigner must either be a U.S. citizen or have a principal residence in the U.S.

Can I use gift money with an FHA loan?

Yes, gift money received from family members, employers, close friends, charities and government programs can be used in association with an FHA loan, as long as you provide proper documentation and meet other requirements.

However, borrowers still must meet the Minimum Required Investment (MRI) by bringing in enough of their own cash to the table to cover at least 3.5% of the home’s purchase price. This money can include certain gifts, but it cannot include any money from the seller or anyone who has a financial interest in the transaction, and it cannot include money that will have to be repaid.

Can I use an FHA loan to flip property?

There is no requirement that you have to reside in your home for any amount of time and nothing the stops you from paying your FHA loan off early, so it is possible to use an FHA loan to buy a house and quickly sell it.

However, you cannot use an FHA loan to buy a property that is being resold within 90 days of the prior purchase. And if it has been 91-180 days since the prior purchase, you will need to pay for a second appraisal if the sales price is more than 100% of the price paid by the prior buyer.

In other words, you can use an FHA loan to buy a property that you want to flip, but there are restrictions around using an FHA loan to buy a property that has been flipped.

Can I have more than one FHA loan at a time?

In general, you are not allowed to have more than one FHA loan at a time. However, the following situations might qualify you for an exception:

  • You are relocating more than 100 miles from your current home for work-related reasons.
  • Your family has grown since you took out the original FHA loan and your current loan-to-value ratio (LTV) is 75% or less.
  • You are leaving your current home with no intention to return and you have a co-borrower who is staying in the home.
  • You are a co-borrower on an FHA loan but do not live in the home.

Can I get an FHA loan after foreclosure or bankruptcy?

FHA loans are generally not available within three years of a foreclosure, though you may qualify for an exception if you can prove the foreclosure was due to circumstances beyond your control and you have worked to reestablish good credit since the foreclosure.

If you filed Chapter 7 bankruptcy, you generally won’t be eligible for an FHA loan until two years have passed since discharge. If you filed Chapter 13 bankruptcy, you will generally be eligible for an FHA loan after one year of making payments on your payment plan. In both cases, exceptions can be made if you can show that the bankruptcy was due to circumstances beyond your control.

What are low down payment alternatives to an FHA loan?

FHA loans are not the only way to take out a mortgage with a low down payment. Here are some of the other options:

  • The USDA Single-Family Housing Guaranteed Loan Program allows borrowers in eligible rural communities to put as little as 0% down.
  • The Fannie Mae HomeReady® Mortgage allows eligible borrowers to put as little as 3% down.
  • The Freddie Mac HomePossible® Mortgage allows eligible borrowers to put as little as 5% down.
  • The VA home loan program allows veterans to put as little as 0% down.
  • Conventional mortgages can allow a down payment as low as 3%, though there are typically stricter requirements compared with the other programs.

How can I get an FHA loan?

There are a few steps to take before applying for an FHA loan:

  1. Check your credit report to ensure its accuracy and clear up any problems.
  2. Save enough for at least a 3.5% down payment.
  3. Get a handle on your budget and make sure that you can afford the monthly costs that will come with the house.

From there, you can use LendingTree’s FHA loan rate tool to start shopping around, and you can use the HUD’s search tool to find an FHA-approved lender to get the process started.

 


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