FHA home loans are residential mortgages that are insured by the Federal Housing Administration (FHA). These government-backed home loans are available to all borrowers and can be used to purchase or refinance homes.
The “normal” FHA mortgage is designated a 203(b) home loan; however, there are other types of FHA home loans, such as a 203(k) renovation loan and 203(h). This article will focus on “normal” 203(b) FHA mortgages that are not in high-balance areas of the country.
203(b) FHA Home Loans Basics
When someone references a FHA home loan, it’s assumed they are taking about a FHA 203(b) home loan. Section 203(b) is the centerpiece of FHA and is the “normal” FHA loan.
The U.S. Department of Housing and Urban Development (HUD) governs the Federal Housing Authority (FHA). This means the U.S. Government insures FHA home loans and protects FHA-approved lenders against potential losses should a borrower default. In other words, the FHA ensures that lenders gets their money back when a house is foreclosed.
FHA is often dubbed a “first time home buyer program” but anyone can apply for an FHA home loan. FHA’s credit guidelines and down payment requirements are typically more flexible than those of conventional loans.
Some of the program highlights for FHA home loans are:
- Primary residences only (i.e. no vacation home or investment properties),
- Minimum down payment of 3.5% down (which can come from gift funds),
- Mandatory escrow account for taxes and insurance,
- Allows up to 6% seller concessions to cover closing costs,
- Mandates 1.75% upfront MIP (that can be rolled into the loan amount),
- Monthly MIP payment for the life of the loan (unless the down payment is 10% or more)
FHA’s Flexible Underwriting
The reason why FHA is thought of as a first-timer buyer program is because of it’s flexible guidelines. Many lenders (like us) will allow credit scores as low as 580. Moreover, the underwriting process for FHA loans is more lenient.
Government home loans (like FHA, VA, and USDA) allow for manual underwrites. This mean that a human Underwriter can approve a loan with unique circumstances that an automated underwriting system may otherwise deny.
Conversely, conventional home loans – which are loans backed by Fannie Mae and Freddie Mac – typically do not allow manual underwrites. Those loans must be approved by automated systems and do not allow for extenuating circumstances.
FHA home loans often times allow higher debt-to-income (DTI) ratios compared to other mortgage programs. This means that someone may be able increase their purchasing power and afford a bigger home. Check out our monthly payment and DTI calculator for more information.
FHA Maximum Loan Limits
The FHA home loans have maximum loan amounts that vary by county. FHA’s maximum loan amount allowed for most of north Texas counties is $450,800 as of the year 2022.
Note: there is no maximum to the FHA sales price, only the loan amount is limited. For example, FHA financing is available if someone is buying a home in Dallas for $1,000,000; so long as the down payment is $549,200 (which makes the loan amount the allowed $450,800).
FHA’s County Loan Limit Search provides the maximum loan amount for all counties in America. Below is a search result example for Dallas County in Texas. Notice the “one-family” maximum loan amount is the aforementioned $450,800.
FHA Home Loans: 2022 chart for FHA maximum loan amount in Dallas County
FHA Mortgage Insurance Premium
FHA home loans have two types of mortgage insurance: upfront MIP (UFMIP) and annual mortgage insurance (that is paid monthly). FHA mandates these mortgage insurance premiums regardless of down payment amounts.
FHA home loans offer the following advantages over conventional financing:
- More flexible credit guidelines
- Low down payment requirements (3.5%)
- Potentially lower interest rates
The two primary disadvantages to FHA’s mortgage insurance are the cost and duration.
The FHA upfront funding fee is 1.75% and it can be rolled into the loan amount.
The FHA annual mortgage insurance premium is part of the monthly mortgage payment. This is permanent for the life of the loan if the down payment is less than 10%.
FHA Upfront MIP of 1.75%
The FHA upfront mortgage insurance premium (UFMIP) is mandatory for FHA home loans. By default, the FHA UFMIP of 1.75% is automatically added to mortgage balance. Adding this to the loan amount does not impact the LTV for underwriting purposes.
FHA home loans have a “base loan amount” and a “final loan amount”. The base loan amount equals the purchase price minus the down payment. The final loan amount adds the upfront MIP to the base loan amount.
For example: a $200,000 home with a 3.5% down payment of $7,000 has a base loan amount of $193,000 ($200,000 sales price minus the $7,000 down payment). The final loan amount is $196,377 after the upfront MIP of 1.75% ($3,378) is added to the base loan amount.
The underwriting LTV is 96.5% in this example; however, the real LTV is 98.19%. ($196,377 final loan amount divided by the $200,000 sales price).
FHA Monthly MIP Factors
FHA’s annual mortgage insurance premium is actually paid monthly which is why it’s commonly referred to as the “monthly MI.” The PMI factor is based on the loan’s duration and the down payment amount.
The FHA monthly MIP factors for purchase loans are as follows:
- For loans greater than 15 years, the PMI is either .85% or .80%.
- The .85% factor applies to loans that have a LTV greater than 95%.
- The .80% factor is for loans with a LTV less than, or equal to, 95%.
- For loans 15 years or less, the PMI is either .70% or .45%.
- The .70% factor applies to loans that have a LTV greater than 90%.
- The .45% factor is for loans with a LTV less than, or equal to, 90%.
Example: a 30-year-fixed-rate FHA home loan with a 3.5% down payment has a PMI factor of .85%. This means on a $196,377 loan amount, the monthly PMI payment would be $139.10 per month. ($196,377 final loan amount multiplied by .0085 and then divided by 12 months).
FHA MIP for Refinances
FHA refinances are an exception. The amount of the Annual MIP for FHA streamline refinance transactions of existing FHA loans that were endorsed on or before May 31, 2009 remain at their existing levels.
Multiple FHA Home Loans
The purpose of FHA home loans is to provide financing for primary homes. FHA does not want to be a financing vehicle for aspiring real estate investors. For this reason, FHA generally will not insure multiple FHA home loans to one borrower at the same time; however, there are exceptions.
“At the same time” is the key component. FHA will allow someone to buy multiple properties using FHA financing so long as the previous FHA loan is paid off before the new purchase.
For example, Joe Buyer used FHA to buy his current home. Joe is now selling his home and will be purchasing a new home using FHA again. This is permissible so long as the current home is sold and closed before the purchase of the new home.
Exceptions for Multiple FHA Home Loans
There are exceptions that allow multiple FHA home loans. Below are the mots common examples of when HUD will allow multiple homes to be financed at the same time:
- Vacating a jointly owned property (such as a divorce),
- Relocation to another city,
- Non-occupying co-borrower,
- Increase in family size.
Vacating a Jointly Owned Property
FHA will allow multiple FHA home loans to someone if they are vacating a residence that will remain occupied by a co-borrower. The most common example of this is when someone gets divorced and vacating home has FHA financing.
This is the easiest exception for multiple FHA home loans because it’s easily documented and obvious.
A borrower may obtain a second FHA home loan if they are relocating to another city that is not within a reasonable commuting distance. This guideline can be subjective and is based on common sense.
For example, Joe Buyer owns a home in Dallas, Texas and used FHA to purchase that home. Joe has decided to keep his home in Dallas and use it as a rental property. FHA will allow Joe to get a new FHA home loan to purchase a new home in Boise.
By contrast, an Underwriter may not allow Joe to use FHA financing for the purchase of a home in Fort Worth, TX. This scenario will require greater scrutiny and most likely be permitted. The distance between the two cities is only 35 miles. Remember, the relocation must be to a city that is not within a “reasonable commute”.
FHA may allow multiple FHA loans to someone that is a non-occupying co-borrower on another FHA loan.
For example, Joe Buyer has an existing FHA home loan but wants to help his son purchase his first home using FHA. Joe is allowed to co-sign on the new FHA loan for his son.
It worth noting that this exception is heavily scrutinized by the Underwriter. Again, FHA does not want to be a financing vehicle used to acquire investment properties. The story and circumstances need to make sense for this exception to be granted.
Increase in Family Size
A borrower may be permitted to obtain another home with an FHA insured mortgage if the number of legal dependents increases to the point that the present house no longer meets the family’s needs.
The borrower must provide satisfactory evidence of the increase in dependents and the property’s failure to meet the family’s needs.
There is a “catch” to this exception. FHA requires that the existing FHA loan be at at 75% LTV or less. A full appraisal will be required to determine the property’s value.
Example: Joe Buyer and his wife live in their one-bedroom condo that they purchased using FHA financing. They are now parents of newly born triplets and want to buy a new home using FHA financing. This scenario makes sense and will be allowed.
An appraisal will be done on the existing condo. The appraised value is determined to be $200,000. This means that Joe’s current FHA loan must be $150,000 or less to get a new FHA home loan. ($200,000 value multiplied by 75% LTV).