FHA Home Loan FAQs

In May of 2010, we conducted an online survey to measure the popularity of FHA home loans among home buyers. The results were just what we expected, showing a steady rise in popularity. The majority of respondents said they planned to use an FHA loan to buy a home.

But before you make a similar decision, you need to learn all you can about FHA mortgage loans and how they work. That's where this article comes in. Below, we have compiled some of the most frequently asked questions about the FHA loan program.

1. What is an FHA home loan?

It's a mortgage loan that's insured by the Federal Housing Administration, which is part of the federal government. These loans can be issued by any lender that has been approved by the FHA.

2. What is the difference between FHA and conventional mortgage loans?

A "conventional" mortgage is one that is not insured by the federal government. An FHA loan is insured by the government. FHA loans usually have lower down-payment requirements, when compared to conventional mortgages. This is one of the key differences between them. It also accounts for their popularity among first-time home buyers.

The FHA does not actually lend you the money. This is a common misconception. You would still get the money from a regular lender, as with a conventional loan. The difference is the insurance provided by the government. The Federal Housing Administration guarantees the loan, so the lender is covered if the borrower defaults on the loan. This reduces the lender's risk. This is also why the down payment for an FHA loan is generally lower than a conventional mortgage.

There are other differences as well, and we will discuss them throughout this article.

3. Does FHA do refinance loans, or just purchase loans?

FHA loans are primarily designed for home buyers, as opposed to homeowners who are trying to refinance. If used an FHA loan to purchase your home, and you want to refinance, you could probably do that. But you generally can't refinance into an FHA loan. 

Update: In May 2010, the Department of Housing and Urban Development (HUD) announced some changes to the FHA home loan program. These changes will allow mortgage lenders to provide additional refinancing options to homeowners who are underwater in their loans. That is, people who owe more than their homes are worth. According to HUD, this new option would be available starting in fall of 2010. You can learn more about it on the HUD website.

4. What are the borrowing criteria for FHA loan approvals?

There are down-payment requirements, for one. You will need to put at least 3.5% down on the loan, if your FICO credit score is 580 or above. If your credit score is below 580, you'll have to put at least 10% down. You'll also need sufficient income, based on the size of your loan.

There are FHA loan limits on the size of mortgage you can obtain. You can find mortgage limits for your area by visiting the HUD.gov website.

The lender will also measure your debt-to-income ratio. This is a comparison between the amount of money you earn each month, and the amount you pay toward your various debts. The general rule is that your monthly mortgage costs (including principal, interest, taxes and insurance) should not exceed 29% of your gross monthly income. Your total debts, including your mortgage and everything else, should not exceed 41% of your monthly income. 

5. What are the advantages of an FHA loan?

The two main advantages are the down-payment requirements and the qualification process. Because of the government backing, it's typically easier to qualify for an FHA home loan than a conventional mortgage. You can put less money down too, as long as your credit score is 580 or above. These are the primary advantages that attract borrowers to the program.

6. Are there any disadvantages?

Every type of mortgage loan has certain pros and cons, and that goes for FHA loans as well. Here are some of the potential disadvantages to this financing method.

If you use an FHA mortgage loan to buy a house, you will have to pay an upfront mortgage insurance premium (UFMIP). This is similar to private mortgage insurance or PMI. You will pay the UFMIP as a single lump-sum amount that's added onto your closing costs. It can also be financed into the loan, in some cases. The average cost of this premium is around 2.25% of the loan amount. For example, on a mortgage of $200,000, the UFMIP would equal $4,500.

When using an FHA home loan, you may also be required to pay mortgage insurance on the loan -- in addition to the UFMIP mentioned above. This will increase the size of your monthly payment.

If you used a conventional mortgage loan with a down payment of at least 20%, you would not have to pay any kind of mortgage insurance.

There's another potential disadvantage of using an FHA loan to buy a house. This occurs when you are buying a home in a seller's market, when the seller is likely to receive multiple offers from buyers. The Federal Housing Administration has stricter requirements for the condition of the property, when compared to a conventional loan. This means the seller might be required to make more repairs to the property, in order for the deal to go through. As a result, FHA loans have a bit of a stigma attached to them, in the eyes of some real estate agents and sellers. If a seller gets an equal offer from a buyer with a convention mortgage, they might choose that offer over yours.

7. What credit score do I need for an FHA loan?

In the past, the Department of Housing and Urban Development did not have a minimum credit score requirement for FHA loans. But in the beginning of 2010, they announced a change to that policy. Borrowers now must have a FICO credit score of at least 580 to qualify for the 3.5% down-payment option. Borrowers with scores below 580 will have to make a down payment of at least 10%.

8. Can people with bad credit qualify for an FHA home loan?

It depends how low your score is. HUD has imposed credit-score guidelines that relate to the down payment. With a FICO score of 580 or above, you'll qualify for the 3.5% down payment program. With a score below that, you'll have to put at least 10% down to qualify for an FHA mortgage. If your score is much lower than 580, you might not qualify for a loan at all. This decision will largely be up to the lender you use.

9. What are the property / house requirements for FHA loans?

HUD can tell you about their minimum property standards better than we can. You'll find a variety of PDF documents that cover the subject on the HUD website.

10. How do I find the current FHA mortgage interest rates?

The rate you receive will have more to do with your qualifications than the lender you choose. Two different borrowers could get FHA loans through the same lender, but with entirely different interest rates. It will depend on your credit score, your debt-to-income ratio, and several other factors. When you apply for an FHA loan, the lender will quote you a certain rate.

11. Do I have to pay closing costs on an FHA mortgage loan?

Yes. Your closing costs may be 3% to 5% of the loan amount. These costs are regulated by HUD. There are also some maximum fee limits in place to control the costs associated with FHA loans. Learn more

12. What are FHA mortgage limits, and how do they work?

These are limits to the amount of money you can receive for a home loan. Thus, they are also limits on the purchase price of the house, when using the FHA program. You can search for lending limits by county on the HUD website.

13. How do I find an FHA lender in my area?

You can use the lender search tool on the HUD website.