FHA Frequently Asked Questions

While you're considering different mortgage options, you may have some questions about FHA loans. What does FHA stand for? What is an FHA mortgage? Here are our FHA FAQs –  requirements, refinancing, the application process, and more. Read on as you figure out if an FHA loan is right for you. 

FHA loan basics

The mortgage world is full of alphabet soup – jargon and acronyms that can make a first-time homebuyer feel like an outsider. You’re not alone in wondering what this FHA stuff is all about. Let’s start from the beginning.

What is the FHA?

FHA stands for the Federal Housing Administration, which is part of the U.S. Department of Housing and Urban Development (HUD). The FHA was founded in 1934 to help more Americans buy homes at a time the housing industry was shrinking due to hardships from the Great Depression.

The FHA’s main role is to provide mortgage insurance on loans made by FHA-approved lenders. This supports a central goal of the FHA program: Protecting FHA-approved lenders when a borrower defaults on a loan.

What is an FHA home loan?

The FHA loan program makes homeownership more attainable for people who may not qualify for a conventional mortgage. Its unique advantages include low down payments, lower closing costs, and lower credit score requirements compared to conventional loans. The FHA insures the loans, allowing FHA-approved lenders to offer mortgages to home buyers that lenders may otherwise view as too risky.

Are FHA loans good?

FHA loans can be an outstanding option if you don’t have a 20 percent down payment, or don’t meet the credit qualifications for a conventional mortgage. More lenient requirements have made FHA mortgages a favorite for first-time homebuyers purchasing medium-priced homes.

FHA loans can also be well suited to someone with landlord experience wishing to finance a multifamily unit that they will live in. If a borrower lives in a unit, an FHA loan can be used to purchase a building with up to four residential units. The landlord typically puts some or all of the rent toward the loan repayment.

Are FHA loans bad?

FHA loans have helped millions of families buy homes they otherwise wouldn’t have had access to. But they may not be the best fit for those with excellent credit and savings for a 20 percent down payment, especially if they’re in the market for a higher-priced home. If you have an established credit history and score above 720, a conventional loan might be a better match.

And just like any mortgage option, there are pros and cons of an FHA loan. Lower upfront costs may mean you’ll pay more for the loan overall. Be sure to discuss the details with your lender and review your loan estimate so you know what to expect.

How does an FHA loan work?

Obtaining an FHA loan fits within the home buying process similar to other mortgage types. But you’ll want to learn its special qualifications and requirements ahead of time to help guide your home search and offer negotiations. Once your loan is approved, you’ll close and begin making monthly mortgage payments.

What are the different types of FHA programs?

There is a wide variety of FHA home loans for virtually any type of home financing scenario. These include refinancing options, loans for home improvements and energy-efficient upgrades, and graduated payment loans that increase as income and home equity increase.

Not all lenders offer all FHA loans, but here is a list of the available FHA loans provided by HUD.

Are FHA 203(k) loans a good idea?

The fixer-upper loan: A 203(k) is a government rehab loan that lets you get one loan to both purchase a property and renovate it. Or if you're refinancing, you'll refinance your current loan, plus get money for repairs. Many borrowers find having a single loan more manageable.

There are two types of 203(k) renovation loans depending on how much repairs are needed.

• Standard – For repairs of $5,000 and up. The total loan can't exceed the FHA lending limits.
• Limited – For smaller repairs. There are no minimum amounts for repairs, but they can't exceed $35,000.
  

The 203(k) is an excellent mortgage option for many borrowers. These rehab loans work well – for homes that just need a new roof as well as homes that need more extensive repairs. One of the biggest advantages is having one loan for the purchase or refinance that includes money for needed upgrades.

But not all lenders offer the 203(k) loan. FHA-approved 203(k) lenders aren't as easy to find because these loans can be complicated and time consuming.

FHA rules and requirements

Like any type of mortgage, there are specific guidelines including a minimum credit score for an FHA loan and how much down payment is required. Here are some common questions surrounding this topic.

How easy is it to get an FHA loan?

Generally, an FHA loan is easier to qualify for as a borrower. But FHA property guidelines are stricter than a conventional loan. There are rules regarding a home’s value, occupancy, and safety.

Before closing, a home must be reviewed by an FHA-certified appraiser to ensure it meets the minimum property standards. Meeting all the FHA requirements can sometimes cause hurdles and setbacks throughout the lending process.

Who is eligible for an FHA loan?

Who qualifies for an FHA loan is based on the FHA guidelines and requirements set by your lender. This generally includes:

• Minimum credit score of 500, but often 620, depending on the lender
• Down payment of at least 3.5 percent
  
• Mortgage payment to gross income ratio of 31 percent or less
  
• Debt to income (DTI) ratio of 43 percent or less
  
• Owner occupies the property as a primary residence
  
• Minimum property requirements are met

Learn how to qualify for an FHA loan.

What is the minimum credit score for an FHA loan?

The FHA is known for having less strict guidelines for credit scores. The minimum credit score for an FHA loan is 500, but each lender may have their own requirements, overlays. A common requirement for an FHA loan credit score is 620, though some lenders will go as low as 580.

What is the FHA minimum down payment?

FHA loan down payment requirements are based on credit score. If your  credit score is below 580, your down payment will be higher. Because many lenders require a credit score above 580 to qualify for an FHA loan, 3.5 percent down is very common.

And if you don't have money for a down payment, it's acceptable to get help. FHA loan down payment requirements allow gift funds to come from family, close friends, an employer, a union, or government down-payment assistance programs. Those rules are not as strict as conventional guidelines, which only accept gift funds from relatives.

Does the FHA require seasoned funds?

Yes. Lenders want to see that you can save money and are financially responsible. They want to make sure you didn't receive the money on a short-term basis, such as from a credit card cash advance or a payday loan. That means the funds have been in your bank account for at least two bank statement cycles, and they must show the source.

• Sourcing funds shows where the money came from.
• Seasoning shows when the money was deposited.

Any unusual deposits that don't come from the sources shown on your application will be a red flag. For example, if you receive four deposits like clockwork every month, but one month you receive an additional large deposit — the underwriter will want to know where those funds came from. You'll need to provide documentation like canceled checks or bank statements that show the funds' origin.

Acceptable sources and documentation include:

• Gift funds with a signed gift letter
• Bonus income from work
  
• Sale of assets like a car/motorcycle etc. with receipts
  
• Security deposit, insurance, and tax refunds
  
• Proceeds from the sale of stocks and real estate
  

It's essential to deposit funds separately. Don't mix them with any other funds. That way, you can match the source with the exact deposit amount.

Cash is not an acceptable source of funds.

Do FHA loans have PMI?

FHA loans require a specific type of  mortgage insurance called a mortgage insurance premium (MIP). MIP works a bit differently from PMI, which is only required until you have 20 percent equity in your home.

With MIP, it depends on the down payment. MIP is paid for the life of the loan if your down payment is under 10 percent. If you make a 10 percent or higher down payment, MIP will drop off after 11 years.

There are two types of MIP:

• Up Front Mortgage Insurance Premium (UFMIP) – Upon closing on an FHA loan, there is an upfront mortgage insurance premium of 1.75 percent of the loan amount. This can be rolled into the loan or paid as a closing cost.
• FHA Monthly Insurance Premium (MIP) – There is also an annual MIP that can range from 0.45 percent to 1.05 percent depending on your loan parameters. This is usually split into monthly installments as part of your mortgage payment.
  

How many FHA loans can you have?

Can you have two FHA loans? Generally, you can only have one FHA loan at a time. FHA loans are intended to help you purchase a home you’ll live in as a primary residence, not an investment property.

But there are certain exceptions the HUD allows a borrower to keep their current house and purchase another. These include:

• Job relocation that exceeds reasonable commuting distance from current home
• Change in family size where the current home doesn't meet the family's needs
  
• Vacating a jointly owned property
  
• Non-occupying co-borrower

You can always ask your lender to review your specific situation.

FHA refinances

Already have an FHA loan? You may have some questions about refinancing into a new mortgage.

How do I refinance my FHA mortgage?

Your FHA mortgage can be refinanced into another FHA loan. Or, if you have some equity and your credit score is high enough, consider refinancing into a conventional loan. The advantage of refinancing into a conventional loan is that you can get rid of mortgage insurance payments. If you're refinancing into another FHA loan to lower your rate, you could still have MIP for the life of the loan.

Are FHA streamline loans a good idea?

If you already have an FHA loan and want to lower your rate or change the loan's term, a streamlined refinance can be a good idea. But there's no cash-out with a streamline. A streamlined refinance is typically faster and has less paperwork than a regular refinance. If you've had the property for more than six months and your financial situation is the same, there may not be a credit check.

To refinance, there has to be a net tangible benefit. Your new rate or term has to be better than what you currently have.

Can I refinance my FHA mortgage with bad credit?

It depends on how bad. Most lenders do look for a score of at least 600, often 620. Some lenders may go down to 500 with a higher down payment or compensating factors, and there will likely be non-negotiables about delinquencies or defaults on any other mortgage or government loan.

If your financial situation is similar to when you obtained your loan, the lender may not pull your credit. For example, if you and your spouse received your FHA loan a year ago and both have the same job — and your income is similar — you might not be required to have a credit check. But you won't know until you talk to your lender.

FHA loan process

Finally, let’s talk logistics. If you decide an FHA loan is right for you, how and where do you go about getting one?

How do you get an FHA loan?

The FHA only insures the loan. They don't lend the money. To get an FHA loan, you have to go to an approved lender. You can find an FHA lender at credit unions, banks, and at mortgage brokerages.

How do I find FHA lenders near me?

You can find FHA-approved lenders in your area using the HUD lender list search tool. Once you enter your criteria, it will provide a list of options for you to consider. It may help to narrow your search by asking friends and family if they have experience with any of the provided lenders.

Don’t be afraid to contact multiple lenders until you find one you’re comfortable with. Rates are only one factor in finding an FHA lender you trust.

How do I get preapproved for an FHA loan?

With a preapproval letter in hand, you can show a seller you're a serious potential buyer because a lender has determined you have the financial means to purchase a home. You can get preapproved by contacting one or more FHA lenders and providing verifiable identification, income, and assets. Be sure to tell them you’re interested specifically in an FHA loan.

How long does it take to get an FHA loan?

This depends on many things, including the lender, the borrowers, the sellers, and the property. When interest rates are low, lenders often get busier. The turnaround for loan processing and underwriting can take longer than it does for conventional loans. Plus, because only FHA-certified appraisers can do the appraisal, this step can take longer than a typical appraisal.

And if something comes up in the appraisal or inspection, the buyers and sellers might have to renegotiate. Repairs can add weeks — especially in peak season when contractors are busy. The key is to have realistic expectations and do whatever you can to keep the loan moving along. If the underwriter needs information, an explanation, or documentation, get it to them quickly.

How do I apply for an FHA loan?

Applying for an FHA loan is relatively simple. Once you’ve confirmed that you meet the FHA qualifications, gather your documents for a mortgage application. Your lender will help you through the step-by-step process, including scheduling an FHA appraisal prior to closing.

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