FHA Home Loans Basics (and videos)

FHA Loans Overview

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.

What Is an FHA Home Loan?

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. 

So, how do FHA home loans work? Let’s take a look.

FHA Home Loan Qualifications

You normally need a credit score of at least 580. If your score is between 580 and 600, you can apply for an FHA loan, but you might not get the maximum Loan to Value (LTV) available. Often time, a 10% down payment will be required if the credit score is a 580.  

The property must also meet minimum quality requirements. Any repairs to bring the home up to standard must be completed before closing or the loan won’t be provided.

You’ll also need a certain level of mortgage insurance, which we’ll cover below. 

203(b) FHA Home Loans Basics

When someone references an FHA home loan, it’s assumed they are talking about an 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 get their money back when a house is foreclosed.

Is a 203(b) Home Loan a First Time Home Buyer FHA Loan? 

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 its 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 means 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 allow higher debt-to-income (DTI) ratios compared to other mortgage programs. This means that someone may be able to increase their purchasing power and afford a bigger home. Check out our monthly payment and DTI calculator for more information.

The FHA home loans have maximum loan amounts that vary by county. FHA’s maximum loan amount allowed for the majority of north  Texas counties is $472,030  as of the year 2023.

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). 

The loan limits can vary each year. 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 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.

Are there funding fees for FHA loans? Sure. 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 Loan Home Insurance Requirements

If you have an FHA home loan, you need a certain level of hazard insurance to cover the property. Meaning, you’ll need enough homeowner’s insurance to meet your lender’s requirements. 

FHA borrowers should check their policy to determine what home insurance they’ll need before they commit to a loan.

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 the 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 Home Loan 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).

Is There a Max Loan Amount on FHA Home Loans?

Yes. What Is the Maximum LTV on an FHA Loan? Well, for clarity, we should emphasize that the maximum LTV for the most common types of FHA home loans is 96.5%. 

If you require a higher loan-to-value ratio, meaning you need a bigger loan, then an FHA home loan may not be the best option. 

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 most 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 the vacating home has FHA financing.

This is the easiest exception for multiple FHA home loans because it’s easily documented and obvious. 

FHA Home Loans and Relocations

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. He used an FHA home loan 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 not 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”.

Non-Occupying Co-Borrower

FHA may allow multiple FHA home 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 is 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.

There are some catches, though: 

• The borrower must provide satisfactory evidence of the increase in dependents and the property’s failure to meet the family’s needs.
• FHA requires that the existing FHA loan be 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).

What are the Advantages of FHA Home Loans?

All loans, including FHA home loans, have pros and cons. Here’s a rundown of why FHA home loans can be a suitable option. 

• Since down payments are fairly low, these loans are more accessible to buyers with smaller deposits. 
• Closing costs can be lower than with other home loans. 
• There can be more lenient lending requirements (such as credit scores and debt-to-income ratios) compared with other loan options. 

Are There Downsides to FHA Home Loans?

Although FHA home loans are great for some people, they’re not right for everyone. Here are some possible downsides to bear in mind.

• The interest rates can be higher than with conventional loans, depending on the loan terms. 
• The upfront mortgage insurance premium adds an extra cost to your loan. 
• Some buyers might find the max loan amount on an FHA too restrictive for their needs. 
• There may be fairly strict minimum property requirements for obtaining an FHA loan.

Get an FHA Home Loan

Hopefully this FHA loan overview has shed some light on the different options available and whether this could be the right option for you. FHA loan requirements can seem tricky, but Mortgage Mark is here to make things simple. 

To find out if you qualify for an FHA and for help choosing the right mortgage lender, contact our team or apply now. A member of the Mortgage Mark Team is waiting to assist you!