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MORTGAGE
What is an FHA Loan?
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Updated March 20, 2023
There are two main types of mortgages — government-backed and non-government-backed. An FHA loan is a government-backed loan insured by the Federal Housing Administration and offered by approved lenders. Many first-time homebuyers can get into a home with an FHA mortgage. In this article, we will discuss purchasing a one-unit property like a single-family home, condo, or townhome. Read on to learn more.
FHA Loan Limits 2023
Every year the FHA comes out with lending limits. For 2023 the limits range from $472,030 to $1,089,300 depending upon the property's location. High-cost areas like San Francisco and Washington DC, of course, have higher limits. It's easy to search to see what the FHA mortgage limits are for the area you want to purchase in.
Compared to conventional loans, the FHA limits for the majority of the country are much lower. For example, for 2023, conventional loan limits range from $726,200 to $1,089,300 in high-cost areas. Although the high-cost areas have limits, most of the country for FHA loans can only go up to $472,030 You can see how the limits compare in this chart:
One-Unit |
In most of the country |
For high-cost areas |
FHA Lending Limits |
$472,030 |
$1,089,300 |
Conventional Lending Limits |
$726,200 |
$1,089,300 |
So that's the first thing to keep in mind with an FHA loan, make sure you're not looking at homes that exceed the lending limits.
FHA Interest Rate
Generally, the average FHA loan interest rate will be lower than the conventional rate under the same circumstances. For example — same loan size, credit score, down payment. When shopping for a loan, it's essential to compare your options. But, along with that lower interest rate comes mortgage insurance premiums (MIP), which are added to your monthly payment.
So, when you're comparing an FHA interest rate vs. a conventional interest rate, make sure to compare payments with that include the MIP.
We'll talk more about MIP below.
FHA Credit Score Requirements
One of the best things about an FHA loan is the credit score requirements are much lower. The lowest credit score the FHA will insure a loan for is 500. But that doesn't mean the lender will accept a score of 500.
Many lenders have their credit requirements which include a score of 620 or more. It's crucial to find out what score you'll need for the lender you're going to. If your score is lower than 620, it's worth taking the time to work on your credit to raise your score.
FHA is also more lenient on derogatory credit or credit events such as bankruptcy or foreclosure than conventional loans. But, since this is a government-backed loan you can't have delinquent or charged-off student loans or other government loans like an FHA, VA, or USDA mortgage. Your federal taxes also have to be current.
FHA Minimum Down Payment
The lowest down payment you can have for an FHA loan is 3.5% of the purchase price. So, if you're buying a house that's $300,000 — you'll need $10,500. But you have to have a score of 580 or higher.
If your score is between 500 to 579, you'll need to put down a higher down payment of 10% of the purchase price. For a $300,000 home, you'd need $30,000. That's quite a big difference, so it does pay to work on your credit to get your score as high as possible.
Another advantage of an FHA loan is that the down payment can be a gift from a family member, employer, or charity.
One thing to note is that the FHA has mortgage insurance premiums no matter how much you put down. Whereas if you put down 20% on a conventional loan you won't have any.
How much is the FHA mortgage insurance?
You may have heard about private mortgage insurance (PMI). For an FHA loan, they call it mortgage insurance premium (MIP). This insurance protects the lender — not the borrower. The annual MIP amount can range between 0.15% to 0.75% of your loan. For a $300,000 loan — it can add a few hundred dollars per month to your payment.
FHA mortgage insurance lasts for 11 years or the life of the loan, depending on how much you put down. In contrast, there is no PMI on a conventional loan with 20% down. Also, once you have 20% equity on a conventional loan, you can ask the lender to remove this extra insurance. But, qualifying for a conventional loan is harder than an FHA. No matter what you choose, it's always good to weigh all of your options.
FHA mortgages are a way to get a borrower into their first home. And even if you're not a first-time homeowner, you can still get an FHA loan. And with rates being so low, buying a home is more possible than ever before.
