An FHA loan is a mortgage insured by the Federal Housing Administration. Allowing down payments as low as 3.5% with a 580 FICO, FHA loans are helpful for buyers with limited savings or lower credit scores.
Whether you’re already sure an FHA loan is right for you or you’re still trying to figure out just what the FHA is, we’ve broken it all down.
The FHA has a maximum loan amount that it will insure, which is known as the FHA lending limit. These loan limits are calculated and updated annually, and are influenced by the conventional loan limits set by Fannie Mae and Freddie Mac. The type of home, such as single-family or duplex, can also affect these numbers.
- What is a FHA Loan?
- What is the FHA?
- What is FHA 2020 Limit?
- How much can I put down on an FHA Loan?
- Why do Sellers Hate FHA Loans?
- What is the Downside of an FHA Loan?
- Who Qualifies for FHA Mortgage?
- How can you Qualify For An FHA Loan?
What is a FHA Loan?
An FHA loan is a mortgage insured by the Federal Housing Administration. With a minimum 3.5% down payment for borrowers with a credit score of 580 or higher, FHA loans are popular among first-time home buyers who have little savings or credit challenges.
Read Also: VA Home Loan Specialist
The FHA insures mortgages issued by lenders, like banks, credit unions and nonbanks. That insurance protects lenders in case of default, which is why FHA lenders are willing to offer favorable terms to borrowers who might not otherwise qualify for a home loan.
An FHA home loan can be used to buy or refinance single-family houses, two- to four-unit multifamily homes, condominiums and certain manufactured and mobile homes.
Specific types of FHA loans can also be used for new construction or for renovating an existing home.
What is the FHA?
The Federal Housing Administration — better known as the FHA — has been part of the U.S. Department of Housing and Urban Development since 1965. But the FHA actually began more than 30 years before that, as a component of the New Deal.
In addition to a stock market crash and the Dust Bowl drought, the Great Depression saw a housing market bubble burst. By early 1933, roughly half of American homeowners had defaulted on their mortgages.
The FHA was created as part of the National Housing Act of 1934 to stem the tide of foreclosures and help make homeownership more affordable. It established the 20% down payment as a new norm by insuring mortgages for up to 80% of a home’s value — previously, homeowners had been limited to borrowing 50%-60%.
Today, the FHA insures loans for about 8 million single-family homes.
What is FHA 2020 Limit?
No matter which type of FHA loan you’re seeking, there will be limits on the mortgage amount. These limits vary by county. FHA loan limits in 2020 range from $331,760 to $765,600.
The upper limit for FHA loans on single-family homes in low-cost counties is $331,760. An example is Lucas County, Ohio, where Toledo is located. The upper limit for FHA loans in the highest-cost counties is $765,600 — San Francisco County, California, for example.
Some counties have housing prices that fall somewhere in between, so the FHA loan limits are in the middle, too. An example is Denver County, Colorado, where the 2020 FHA loan limit is $575,000. You can visit HUD’s website to find the FHA loan limit in any county.
Most counties in Texas fall within the lower lending limit, whereas Santa Cruz County in California meets the maximum income range. However, some counties have housing prices that fall in between, so those FHA limits are in the middle.
For instance, if you live in Amelia County in Richmond, Virginia, your ceiling is $535,900. For residents of Clark County, which includes Portland, Vancouver and Hillsboro in Washington, the lending limit is $491,050.
Most of the country saw their lending limits increase, which was mostly thanks to the rise in home prices across the U.S. According to the National Association of Realtors, 96 metro areas saw their home prices increase by more than 5% in the third quarter of 2019.
However, a few counties did have their lending limits fall. Dutchess County, which includes Poughkeepsie, Newburgh and Middletown in New York, saw their lending limits drop from $726,525 in 2019 to $356,500 in 2020.
FHA Limits (low cost areas) | |||
Single | Duplex | Tri-plex | Four-plex |
---|---|---|---|
$331,760 | $424,800 | $513,450 | $638,100 |
Also for 2020, the FHA ceiling was set at $765,600 for single-family home loans. This represents the highest amount that a borrower can get through the FHA loan program. It applies to high cost areas in the United States and is illustrated in the table below.
FHA Limits (high cost areas) | |||
Single | Duplex | Tri-plex | Four-plex |
---|---|---|---|
$765,600 | $980,325 | $1,184,925 | $1,472,550 |
Alabama FHA Lending Limits
Includes FHA limits in Florence, Sheffield, Fort Payne, Hamilton, Jasper, Birmingham, Northport, Tuscaloosa, Selma, Montgomery, Eufaula, Monroeville, Dothan, Mobile, Daphne…
Alaska FHA Lending Limits
Includes FHA limits in Barrow, Nome, Fairbanks, Bethel, Anchorage, Homer, Seward, Kodiak, Unalaska, Juneau, Sitka, Petersburg…
Arizona FHA Lending Limits
Includes FHA limits in Bullhead Cuty, Tuba City, Flagstaff, Winslow, Prescott, Phoenix, Scottsdale, Mesa, Tempe, Florence, Casa Grande, Yuma, Flowing Wells, Tucson, Green Valley, Douglas…
Arkansas FHA Lending Limits
Includes FHA limits in Springdale, Pocohontas, Fayetteville, Van Buren, Mountain View, Fort Smith, Russellville, Searcy, Little Rock, West Helena, Hot Springs, Arkadelphia, Pine Bluff, Camden, Magnolia, El Dorado…
California FHA Lending Limits
Includes FHA limits in Arcala, Eureka, Redding, Chico North, Paradise, Ukiah, Linda, Santa rosa, Sacraento, Napa, Lodi, San Francisco, San Jose, Turlock, Los Banos, Santa Cruz, Fresno, Visalia, Porterville, Atascadero, Ridgecrest, Bakersfield, Santa Maria, Barstow, Santa Barbara, Thousand Oaks, Los Angeles, Santa Ana, Laguna Beach, San Diego, El Centro…
Colorado FHA Lending Limits
Includes FHA limits in Craig, Rangely, Fort Collins, Greeley, Sterling, Yuma, Boulder, Westminster, Denver, Castle Rock, Glenwood Springs, Black Forest, Buena Vista, Colorado Springs, Lincoln Park, Pueblo, Montrose, La Junta, Walsenburg, Monte Vista, Cortez, Durango, Alamosa, Trinidad…
Connecticut FHA Lending Limits
Includes FHA limits in Winsled, Windsor Locks, Bristol, Hartford, Danielson, Norwich, Groton, New Milford, Danbury, Starford, Norwalk, Stamford…
Delaware FHA Lending Limits
Includes FHA limits in Newark, Claymont, Brookside, Middletown, Dover, Harrington, Lewes, Seaford, Laurel…
District of Columbia FHA Lending Limits
Washington, D.C.
Florida FHA Lending Limits
Includes FHA limits in Pensacola, Fort Walton Beach, Panama City, Tallahassee, Jacksonville Beach, Lakeside, St. Augustine, Palatka, Gainesville, Ocala, Daytona Beach, Deltona, Leesburg, Orlando, Merritt Island, Cocoa Beach, Melbourne, Vero Beach, Fort Pierce, Port St. Lucie, Riviera Beach, West Palm Beach, Boca Raton, Pompano Beach, Fort Lauderdale, Miami Beach, Belle Glade, Hialeah, Miami, Cutler Ridge, Homestead, Key West, East Naples, Fort Myers, Englewood, Venice, Sarasota Springs, St. Petersburg, Largo Tampa, Clearwater, Kissimmee, New Port Richey…
Georgia FHA Lending Limits
Includes FHA limits in Dalton, Rome, Atlanta, East Point, La Grange, Columbus, Americus, Albany, Tifton, Moultrie, Valdosta, Brunswick, Hinesville, Savannah, Statesboro, Macon, Augusta, Covington, Athens, Gainesville…
Hawaii FHA Lending Limits
Includes FHA limits in Lihue, Honolulu, Kaunakakai, Wailuka, Hawi, Hilo, Captain Cook…
Idaho FHA Lending Limits
Includes FHA limits in Sandpoint, Post Falls, Osburn, Moscow, Lewiston, Grangeville, Salmon, Weisner, Boise City, Ketchum, St. Anthony, Idaho Falls, Blackfoot, Mountain Home, Soda Springs, Buhl, Twin Falls, Montpelier…
Illinois FHA Lending Limits
Includes FHA limits in Rockford, Sterling, Rock Island, Kewanee, Monmouth, Macomb, Lincoln, Springfirld, Quincy, Jacksonville, Waukegan, Oak Lawn, Joliet, Kankakee, Normal, Decatur, Charlston, Effingham, Alton, East St. Louis, Centralia, Mount Vernon, Harrisburg, Carbondale…
Indiana FHA Lending Limits
Includes FHA limits in East Chicago, Gary, Logansport, Kokomo, Crawfordsville, Indianapolis, Terre Haute, Vincennes, Evansville, New Albany, Madison, Bloomington, Shelbyville, Anderson, Muncie, Grant, Wabash, Fort Wayne, South Bend…
Iowa FHA Lending Limits
Includes FHA limits in Spencer, Sioux City, Council Bluffs, Fort Dodge, Boone, Ames, Urbandale, Des Moines, Oskaloosa, Burlington, Keokuk, Davenport, Cedar Rapids, Dubuque, Wateloo, Cedar Falls, Mason City…
Kansas FHA Lending Limits
Includes FHA limits in Norton, Colby, Garden City, Liberal, Hays, Great Bend, Hutchinson, Dodge City, Minneapolis, Salina, McPherson, Newton, El Dorado, Arkansas City, Wichita, Atchinson, Kansas City, Topeka, Ottawa, Emporia, Chanute, Pittsburg…
Kentucky FHA Lending Limits
Includes FHA limits in Fort Thomas, Erlanger, Florence, Ashland, Frankfort, Lexington, Richmond, Somerset, Middlesborough, Elizabethtown, Louisville, Owensboro, Hopkinsville, Fort Campbell North, Mayfield, Paducah, Madisonville, Henderson…
Louisiana FHA Lending Limits
Includes FHA limits in Minden, Bastrop, Monroe, Bossier city, Tallulah, Natchitoches, Alexandria, Pinieville, Fort Polk South, De Ridder, Lafayette, Abbeville, New Iperia, Morgan City, Bayou Cane, New Orleans, Baton Rouge, Bogalusa…
Maine FHA Lending Limits
Includes FHA limits in Madawaska, Fort Fairfield, Presque Isle, Houlton, East Millinocket, Dover-Foxcroft, Calais, Bangor, Bar Harbor, Waterville, Madison, Romford, Augusta, Lewiston, Auburn, Brunswick, Portland, Biddeford, Sanford, Kittery…
Maryland FHA Lending Limits
Includes FHA limits in Lexington Park, Salisbury, Cambridge, St. Charles, Annapolis, Balrimore, Townson, Bethesda, Columbia, Frederick, Hagerstown, Cumberland, Oakland…
Massachusetts FHA Lending Limits
Includes FHA limits in North Adams, Pittsfield, Springfield, Gardner, Worcester, Newburyport, Salem, Boston, Taunton, Fall River, New Bedford, Nantucket…
Michigan FHA Lending Limits
Includes FHA limits in Ontonagon, Iron Mountain, Marquette, Sault Ste. Marie, Crystal Falls, Escanaba, Menominee, Alpena, Traverse City, Cadillac, Bay City, Saginaw, Port Huron, Pontiac, Detroit, Dearborn, Adrian, Ann Arbor, Farmington Hills, Lansing, Niles, Kalamazoo, Holland, Grand Rapids, Muskegon, Big Rapids…
Minnesota FHA Lending Limits
Includes FHA limits in Hallock, Big Falls, Grand Marais, Bemidji, Hibbing, Virginia, Duluth, Moorhead, Fergus Falls, Brainerd, St. Cloud, Willmar, Minneapolis, St. Paul, Northfield, Faribault, New Ulm, Marshall, Owatonna, Rochester, Fairmont, Worthington…
Mississippi FHA Lending Limits
Includes FHA limits in Gulfport, Picayune, McComb, Brookhaven, Laurel, Hattiesburg, Vicksburg, Jackson, Canton, De Kalb, Yazoo City, Greenwood, Columbus, Grenada, Clarksdale, Tupelo, Southaven, Corinth…
Missouri FHA Lending Limits
Includes FHA limits in Maryville, Milan, Kirksville, St. Joseph, Brookfield, Hannibal, Moberly, Liberty, Kansas City, Warrensburg, Columbia, Mexico, St. Charles, St. Louis, Jefferson City, Arnold, Rolla, Perryville, Cape Girardeau, Sikeston, Poplar, Kennett, Joplin, Springfield, Carthage, Fort Leonard Wood…
Montana FHA Lending Limits
Includes FHA limits in Libby, Cut Bank, Kalispell, Poison, Missoula, Deer Lodge, Butte Silver Bow, Helena, Great Falls, Conrad, Havre, Malta, Lewistown, Roundup, Billings, Hardin, Forsyth, Jordan, Glasgow, Plentywood, Wolf Point, Glendive, Miles City…
Nebraska FHA Lending Limits
Includes FHA limits in Chadron, Scottsbluff, Kimball, Gordon, Valentine, Ainsworth, O’Neill, South Sioux City Norfolk, Mullen, Broken Bow, Columbus, Ord, Fremont, Omaha, Bellevue, Lincoln, Beatrice, Superior, Hastings, Grand Island, North Platte, Broken Bow, Kearney, Imperial, McCook…
Nevada FHA Lending Limits
Includes FHA limits in Winnemucca, Elko, Battle Mountain, Sparks, Fallon, Reno, Carson City, Gardnerville Ranchos, Hawthorne, Tonopah, Caliente, Ely, Las Vegas, Paradise, Boulder City…
New Hampshire FHA Lending Limits
Includes FHA limits in Berlin, Lancaster, Littleton, North Conway, Plymouth, Levanon, Claremont, Concord, Manchester, Derry, Nashua, Keene…
New Jersey FHA Lending Limits
Includes FHA limits in Newton, Paterson, Newark, Edison, Stanton, Trenton, Camden, Cherry Hill, Salem, Vineland…
New Mexico FHA Lending Limits
Includes FHA limits in Shiprek, Farmington, Taos, Raton, Clayton, Los Alamos, Santa Fe, Las Vegas, Tucumcare, Santa Rosa, Clovis, Roswell, Artesia, Carlsbad, Las Cruces, Deming, Lordsburg, Alamogordo, Truth Or Consequences, Socorro, South Valley, North Valley Gallup, Albuquerque…
New York FHA Lending Limits
Includes FHA limits in Massena, Potsdam, Plattsburgh, Ogdensburg, North Ebs, Watertown, Fulton, Syracuse, Cortland, Binghamton, Monticello, Newburgh, New City, Yonkers, New York City, Peekskill, White Plains, Hampton Bays, Elmira, Ithaca, Corning, Rochester, Lockport, Niagara Falos, Buffalo, Jamestown, Thurman, Glens Falls, Saratoga Springs, Albany, Chatham, Catskill, Kingston, Poughkeepsie, Oneonta, Schenectady, Utica, Rome…
North Carolina FHA Lending Limits
Includes FHA limits in Murphy, Asheville, Morganton, Boone, Lenoir, Salisbury, Charlotte, Monroe, Albemarie, High Point, Greensboro, Eden, Henderson, Durham, Raleigh, Cary, Fayetteville, Lumberton, Wilmington, Camp Lejeune, Havelock, Kinston, Greenville, Elizabeth City…
North Dakota FHA Lending Limits
Includes FHA limits in Crosby, Williston, Watford City, Hazen, Beach, Dickenson, Bowman, Mandan, Bismarck, Ashley, Oakes, Lisbon, Fargo, Jamestown, Carrington, Mayville, Grand Forks, Harvey, Devils Lake, Grafton, Langdon, Bottineau, Rugby, Minot…
Ohio FHA Lending Limits
Includes Basic Allowance for Housing rates in Toledo, Bryabn, Defiance, Findlay, Lima, Sidney, Springfield, Dayton, Wilmingron, Cincinnati, Portsmouth, Ironton, Athens, Marietta, Lancaster, Columbus, Newark, Delaware, Mansfield, Tiffin, Elyria, Cleveland, Parma, Warren, Akron, Canton, Dover, Cambridge…
Oklahoma FHA Lending Limits
Includes FHA limits in Boise City, Guyman, Woodward, Ponca City, Enid Stillwater, Elk City, Olkahoma City, Edmond, Norman, Chickasha, Ada, Altus, Lawton, Ardmore, Durant, McAlester, Okmulgee, Broken Arrow, Tulsa, Claremore, Bartlesville…
Oregon FHA Lending Limits
Includes FHA limits in Astoria, Portland, Oregon City, woodburn, Salem, Albany, Lebanon, Springfield, Eugene, Coos Bay, Roseburg, Grants Pass, Medford, Ashland, Klamath Falls, Altamont, Bend, City Of The Dalles, Pendleton, Enterprise, La Grande, John Day, Ontario, Burns, Hines…
Pennsylvania FHA Lending Limits
Includes FHA limits in Erie, Meadville, Oil City, New Castle, Butler, Penn Hills, Pitsburgh, Uniontown, Bradford, Williamsport, Sunbury, Towanda, Altoona, Harrisvurg, Bedford, Chambersburg, Montrose, Scranton, Willkes-Barre, Easton, Bethlemem, Allentown, Levitown, Philadelphia…
Rhode Island FHA Lending Limits
Includes FHA limits in Woonsocket, Glocester, Providence, Coventry, Newport, Westerly…
South Carolina FHA Lending Limits
Includes FHA limits in Easley, Greenville, Laurens, Greenwood, Columbia, Cayce, Aiken, Barnwell, Rock Hill, Bennettsville, Florence, Conway, Myrtle Beach, Georgetown, Goose Creek, Charleston, Hilton Head Island…
South Dakota FHA Lending Limits
Includes FHA limits in Buffalo, Bison, Belle Fourche, Sturgis, Lead, Rapid City, Hot Springs, Pine Ridge, Winner, Chamberlain, Pierre, Cherry Creek, Mobridge, Yankton, Canton, Sioux Falls, Mitchell, Madison, Brookngs, Huron, Redfield, Watertown, Milbank, Aberdeen, Sisseton…
Tennessee FHA Lending Limits
Includes FHA limits in Memphis, Bolivar, Jackson, Hujboldt, Union City, Paris, Clarksville, Nashville, Franklin, Columbia, Shelvybille, Chattanooga, Athens, Maryville, Knoxville, Oneida, Greeneville, Elizabethton…
Texas FHA Lending Limits
Includes FHA limits in Dalhart, Amarillo, Canyon, Wichita Falls, Lubbock, Denton, Arlington, Dallas, Fort Worth, Abilene, Snyder, Texarkana, El Paso, Pecos, Van Horn, Fort Stockton, Ozona, San Angelo, Odessa, Mdland, Del Rio, Eagle Pass, Carrizo Springs, Laredo, Rio Grande City, Brownsville, Corpus Christi, Portland, Port Lavaca, San Antonio, Galvestion, Houston, Beaumont, Austin, College Station, Lufkin, Nacogdoches, Waco…
Utah FHA Lending Limits
Includes FHA limits in Logan, Brigham City, Ogden, Salt Lake City, Megna, Murray, Sandy, Orem Provo, Maeser, Roosevelt, Helper, Nephi, Mount Pleasant, Fillmore, Richfield, Moab, Loa, Milford, Panguitch, Monticello, Hurricane, Kanab, Mexican Hat…
Vermont FHA Lending Limits
Includes FHA limits in Newport, Swanton, Island Pond, Burlington, Montpelier, Middlebury, Rutland, Woodstock, Springfield, Arlington, Brattleboro…
Virginia FHA Lending Limits
Includes FHA limits in Briston, Marion, Blacksburg, Martinsville, Danville, Roakoak, Lynchburg, Richmond, Newport News, Chesapeake, Virginia Beach, Exmore, Onancock, Charlottesville, Fredericksburg, Staunton, Harrisburg, Front Royal Winchester, Arlington, Alexandria, Manassas…
Washington FHA Lending Limits
Includes FHA limits in Bellingham, Mount Vernon, Oak Harvor, Port Angeles, North Marysville, Everett, Bremerton, Seattle, Tacoma, Olympia, Aberdeen, Centralia, Longview, Vancouver, Goldendale, Yakima, Ellensburg, Richland, Kennewick, Walla Walla, Pullman, Moses Lake, East Wenatchee Bench, Spokane, Newport, Omak, Kettle Falls…
West Virginia FHA Lending Limits
Includes FHA limits in Weirton, Wheeling, Moundsville, Fairmont, Parkersburt, Clarksburg, Martinsburg, Charles Town, Moorefield, Elkins, Glenville, Poin Pleasant, Huntington, Charleston, South Charleston, Madison, Beckley, Lewisburg, Marlinton, Beckley, Welch, Bluefield…
Wisconsin FHA Lending Limits
Includes FHA limits in Superior, Ashland, Mercer, Shell Lake, Rhinelander, Crandon, Marinette, Wausau, Menomonie, Eau Claire, Marshfield, Green Bay, Wisconsin Rapids, Appleton, Menasha, Oshkosh, Two Rivers, Fond Du Lac, La Crosse, Beaver Dam, Sheboygan, Menoonee Falls, Madison, Richland Center, Madison, Milwaukee, Lancaster, Racine, Kenosha, Monroe…
Wyoming FHA Lending Limits
Includes FHA limits in Evanston, Kemmerer, Green River, Rock Springs, Rawins, Saratoga, Cheyenne, Torrington, Douglas, Paradise Valley, Casper, Lender, Riverton, Jackson, Thermopolis, Worland, Powell, Cody, Lovell, Sheridan, Greybull, Buffalo, Gullette, Newcastle.
How much can I put down on an FHA Loan?
The minimum FHA loan down payment is 3.5% if your credit score is at least 580. You have to put at least 10% down if your credit score is 500 to 579. It’s a big pothole on the road to homeownership: the down payment. FHA loans allow down payments as small as 3.5%.
On a $300,000 home, a 3.5% down payment would cost $10,500. Compare that with the traditional 20% down payment, which would come out to $60,000 on the same home. Big difference. And that’s before closing costs and other buying-a-home expenses.
To get the minimum 3.5% FHA down payment deal, you’ll need a credit score of 580 or higher. If you fall in the range of 500 to 579, you will be required to put at least 10% down.
But FHA loans come with a price tag: mortgage insurance premiums. You’ll pay an upfront fee and ongoing monthly premiums.
Why do Sellers Hate FHA Loans?
Mortgage loans insured by the Federal Housing Administration, better known as FHA loans, have become increasingly popular tools for home buyers. Sellers? They’re not always as thrilled with the product. Why do buyers love FHA loans while sellers often cringe at the thought of working with buyers relying on them? The disconnect might stem from the negative perception homeowners have of buyers who can’t afford larger down payments.
Why Buyers Love Them
It’s easy to understand why homebuyers like FHA loans: They require lower down payments than do most conventional – those not insured by the federal government — mortgage loans. Borrowers with FICO credit scores of at least 580 must only come up with a down payment of 3.5% of their homes’ final purchase price to qualify for a mortgage loan.
Those with scores of at least 500 can still qualify for an FHA-insured loan, but will have to come up with a down payment of 10% of a home’s purchase price.
That 3.5% down payment requirement is a big advantage for potential home buyers. Most conventional lenders — though not all — require buyers to come up with down payments of at least 5% of a home’s purchase price.
Consider a home priced at $200,000. A down payment of 3.5% comes to $7,000. A down payment of 5% on the same home is $10,000.
Why Sellers Worry
Sellers, though, often worry that the type of buyer who relies on an FHA loan might be a riskier one. They worry that the lenders working with these buyers might discover financial problems while verifying their income and debts. If this happens, the lender might withdraw their loan commitment. Sellers who have already entered into a tentative sales agreement with an FHA buyer, then, might see that agreement disappear. That is frustrating.
Sellers often believe, too, that buyers who need a lower down payment might not be able to afford any home repairs. Sellers worry that FHA buyers because of their lack of cash might be more willing to walk away from an offer if the home inspection turns up any problems.
For FHA buyers, these are both cause for concern. The United States today is dotted with sellers’ markets. Homes in desirable neighborhoods often attract several full-price offers.
Sellers might be less likely to accept offers coming from FHA buyers when they can instead choose a cash offer or an offer from buyers relying on traditional mortgage financing. In sellers’ minds, there is simply less risk associated with non-FHA financing.
The Numbers
This is unfortunate because many buyers still rely on FHA financing. According to the U.S. Department of Housing and Urban Development, 15.41 percent of all mortgage loans used to purchase homes in fiscal year 2012 were insured by the Federal Housing Administration.
And many of the buyers relying on FHA loans are those most often underserved by traditional lenders. The National Council of State Housing Agencies found that in 2011, FHA loans accounted for 50 percent of the mortgage loans taken out by African-American borrowers and that 49 percent of home loans issued to Hispanic and Latino Americans are FHA loans.
FHA buyers do have a few options to make their offers more attractive to leery sellers. First, they can make a full-price offer. If FHA buyers can’t compete when it comes to the type of financing they’re using, they can at least compete on sales price. A high offer will make many sellers overlook their FHA concerns.
FHA buyers can also offer to buy a home in as-is condition. This is a risk — buyers never know what problems a home might have — but is one more way in which an FHA buyer can compete.
What is the Downside of an FHA Loan?
FHA loans are popular because they make it relatively easy to buy a home. Still, these loans aren’t for everybody. Make sure you fit the right profile and that you understand the bad aspects of FHA loans before you sign up for one.
There are several reasons for avoiding an FHA loan, including higher costs upfront and in every payment.
1. Not being ready to take on a mortgage
A small down payment could be a red flag. Putting down 3.5% might be a sign that you’re not yet standing on solid financial ground, and taking on a home loan could be too risky for you at this time. Is it worth looking at less-expensive homes or waiting until you can save up a larger down payment? Remember that the more you borrow, the more interest you pay, which essentially makes your house significantly more expensive.
2. Upfront insurance
When you put down less than 20%, you must pay for mortgage insurance. FHA loans come with two types of insurance. There’s an upfront charge of 1.75%, and some borrowers choose to wrap that fee into the loan balance. Again, the more you borrow, the more interest you pay, so you’re paying more than 1.75% unless you write a check at closing. A bigger loan also means you have a larger monthly payment.
3. Ongoing insurance
You’ll also pay ongoing (monthly) mortgage insurance. Ongoing mortgage insurance premium (MIP) amounts are between 0.80% and 1.05% of your loan balance, although they can go as low as 0.45% if you get an FHA loan with a term of 15 years or fewer. Private mortgage insurance can often be canceled once you get above 20% equity in your home.
But with an FHA loan, you typically must pay monthly MIPs for the first 11 years of the mortgage’s term if you put 10% down or for the first 30 years (which means for the entire term of the loan if the term length is the maximum number of years allowed) if you put less than 10% down. To eliminate that cost earlier, you’ll have to pay off your loan or refinance it.
4. Limited loan choices
For better or worse, you’ve got only basic choices when using an FHA loan. For most borrowers, a standard 15-year or 30-year fixed-rate loan is an excellent choice, so the limited options may not be a problem. But there are some situations when an interest-only mortgage or an adjustable-rate loan would be a better fit.
5. Property limitations
The property must meet basic health and safety requirements if you’re going to get approved for an FHA loan. If you’re looking for a fixer-upper or a major bargain, an FHA loan might not work. For properties that are move-in ready, an FHA loan should be fine. However, buying a condo can be challenging: If not enough of the units in your building are owner-occupied (or other problems arise), an FHA loan might not be an option.
6. Seller hesitation
In some situations, an FHA loan can be a disadvantage when buying a home. Sellers like to know about potential buyers (real estate agents may share this information), and an FHA loan does not signal strength. What’s more, the seller may fear that extra requirements are going to slow down (and potentially threaten) the deal. If you’re buying in a hot market, you may want to explore other forms of financing.
Who Qualifies for FHA Mortgage?
The FHA, or Federal Housing Administration, provides mortgage insurance on loans made by FHA-approved lenders. FHA insures these loans on single family and multi-family homes in the United States and its territories. It is the largest insurer of residential mortgages in the world, insuring tens of millions of properties since 1934 when it was created.
- FICO® score at least 580 = 3.5% down payment.
- FICO® score between 500 and 579 = 10% down payment.
- MIP (Mortgage Insurance Premium ) is required.
- Debt-to-Income Ratio < 43%.
- The home must be the borrower’s primary residence.
- Borrower must have steady income and proof of employment.
An FHA Loan is a mortgage that’s insured by the Federal Housing Administration. They allow borrowers to finance homes with down payments as low as 3.5% and are especially popular with first-time homebuyers.
FHA loans are a good option for first-time homebuyers who may not have saved enough for a large down payment. Even borrowers who have suffered from bankruptcy or foreclosures may qualify for an FHA-backed mortgage.
How can you Qualify For An FHA Loan?
FHA loans are not just for first-time home buyers, and they’re not restricted to low-income applicants. Here are the requirements you’ll need to meet to qualify for an FHA loan.
1. Have verifiable income
Steady income that you can verify with pay-stubs or tax returns is the first and most important requirement to get an FHA loan. In general, lenders want to see that you’ve worked for a year or two in the same field (if not the same employer). Under the FHA program, a lender may accept a shorter work history.
2. Be able to afford the housing payment AND any existing debt
The biggest factor in qualifying for an FHA loan is whether you can afford the payment. As a rough guideline:
- your mortgage payment must not be more than 35% of your income (before taxes) and
- your mortgage payment PLUS other monthly debt payments (car loan, credit cards) must not be more than 48% of your income.
You can use our home affordability calculator to see approximately how much house you can qualify for. If you can’t meet these ratios yet, focus on paying off as much other debt as you can before buying a home.
3. Save at least a 3.5% down payment
The minimum required down payment for an FHA loan is 3.5%. In reality, you’ll need to save closer to 6% of the home’s purchase price to account for closing costs- – which include an upfront mortgage insurance premium equal to 1.75% of the home’s value. You can reduce this premium to 1.25% by undergoing an FHA-approved credit counseling program prior to closing.
4. Have an established credit history
At the bare minimum, the FHA requires that applicants have an established credit history with at least two lines of credit (for example, a student loan and a credit card).
5. Have a FICO score of at least 580-640
The minimum FICO score to qualify for the FHA loan program is 580, but the FHA is not a lender, it’s the insurer, and it’s the lender who sets their minimum credit score requirements, which often sit around 640 for FHA loans (as opposed to 700 for conventional mortgages).
If you don’t know your credit score, check your it now for free. If your score is well above 640, you’re safe to apply for an FHA loan. If not, call your chosen mortgage lender and ask what their minimums are for processing FHA loan applications before you officially apply.
6. Purchase a home that does not exceed FHA loan limits
There are federally-set limits to how much you can borrow with an FHA loan that varies by state and county. Fortunately, however, the limits are high enough that most borrowers should not need an FHA loan to buy a more expensive home.
7. Apply for the correct type of FHA loan
Lenders offer a variety of FHA loans in addition to the most common type, the 30 year fixed interest. You can also get a fixed interest rate on an FHA loan for 10, 15, 20 or 25 years or you can get an adjustable rate FHA loan. An adjustable rate loan allows for the fluctuation of interest rates at certain periods of time.
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For example, a 3/1 adjustable rate FHA loan means the interest rate is fixed for 3 years and can adjust every year thereafter. FHA adjustable loans come in the form of a 3/1, 5/1, 7/1 or 10/1 with 30 year terms. These are not as popular as fixed interest FHA loans since they provide more risk to the average homebuyer.
8. Understand the costs of an FHA loan
The drawback of an FHA loan is the mandatory private mortgage insurance (PMI). PMI is insurance you must pay as the borrower — both upfront and monthly — that protects the lender in the event you default. PMI is required for anybody who puts less than 20% down on a home.
9. Begin the application process
If you believe you qualify for an FHA loan and are ready to apply, the first step is to get pre-approved with your lender of choice.
This could be your local bank or credit union, an independent mortgage broker, or any number of national online mortgage lenders.
Don’t be afraid to begin the process with one or two lenders and get quotes for rates, fees, and payments. Even with an FHA loan, the mortgage lending business is competitive and the differences in rates or closing costs could save you thousands.