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FHA Loans: Requirements and Eligibility for 2022
The FHA loan is the oldest and most well-known low down payment mortgage for first-time home buyers. It’s the catch-all option for buyers who don’t meet other low and no down payment mortgage requirements.
FHA loans date back to 1934, when the government formed its Federal Housing Administration to promote affordable homeownership. FHA mortgage loans helped end The Great Depression.
Before the FHA, mortgage loans required that home buyers make down payments of fifty percent or more and pay off their loans in 5 years or fewer, which few renters could manage.
The FHA created a new mortgage standard.
Because of the FHA, U.S. housing stabilized by the late-1930s. Nine decades later, the FHA’s flagship mortgage loan has helped tens of millions of Americans purchase their first home. Nearly 1 in 5 first-time buyers use FHA financing.
Let’s get into everything you need to know about FHA mortgages.
- → What Is an FHA Loan?
- → Brief History of the FHA
- → How Do FHA Loans Work?
- → How to Qualify for FHA Loans?
- → What Are FHA Loan Limits?
- → Types of FHA Loans
- → Comparing FHA Loans vs. USDA Loans
- → Comparing FHA Loans vs. Conventional Loans
- → The Benefits of Using FHA Loans
- → Our Advice – Consider an FHA loan if you haven’t already
What Is an FHA Loan?
Three main traits define FHA loans:
- A down payment requirement of 3.5 percent
- All credit ratings accepted and allowed
- Loan sizes within the FHA’s insurance policy limits
Also, FHA loans are assumable, which means that when a buyer sells their home, the new owner can use the same FHA mortgage at the same mortgage interest rate.
Assumable loans can help you sell at the top dollar when mortgage rates rise.
Brief History of the FHA
The U.S. government formed the Federal Housing Administration (FHA) as part of the National Housing Act of 1934.
Before the FHA, the only place for first-time home buyers to get a mortgage loan was their local community bank.
Because banks were frightened to make home loans and housing was integral to the recovery, the government launched the FHA as an insurance agency for banks. So long as a homeowner and its mortgage met the government’s specified requirements, the FHA agreed to repay the bank should a homeowner default on its payments.
With FHA mortgage insurance available, banks started making loans to first-time buyers again, and housing led the country out of Depression.
Today, the FHA is the largest insurer of mortgages in the world.
How Do FHA Loans Work?
FHA-backed mortgages use the same mortgage contract as other U.S. home loans. Buyers borrow money, agree to monthly payments, and pay off the loan in their choice of 15 or 30 years.
There is no penalty for selling your home before the loan gets paid off, and, as the homeowner, buyers retain the right to pay their loan off faster or refinance it.
FHA loans require that buyers make a down payment of at least 3.5 percent against the purchase price, or $3,500 for every $100,000. There is no maximum down payment amount.
According to mortgage software company ICE, the typical FHA home buyer makes a down payment of less than 5 percent.
How to Qualify for FHA Loans?
To qualify for an FHA mortgage, home buyers and the home they purchase must meet the FHA’s eligibility standards.
The FHA’s published guidelines are more than a thousand pages long, so here are the key points:
- Home buyers must make a down payment of at least 3.5 percent
- Home buyers must have verifiable income and employment
- Home buyers may not be delinquent on federal taxes or federal student loans
- Home buyers may not own another FHA-financed home
- Homes must be free from lead paint and other habitability standards
The FHA doesn’t enforce a minimum credit score for its mortgage program and makes special provisions for buyers with no credit history or credit score. The FHA directs lenders to look beyond a person’s credit score and find the “bigger picture.” Learn more about the credit score needed to buy a house.
There are no unique eligibility standards associated with the FHA mortgage program. Home buyers can live in any residential property in any U.S. city.
Buyers don’t need social security numbers, either. Non-permanent resident aliens can use FHA mortgages, as can employees of the World Bank and foreign embassies.
FHA mortgage guidelines are less rigorous than other government-backed mortgage programs. If you’ve gotten turned down for a conventional mortgage or VA loan, FHA financing could help you stop renting and start owning.
What Are FHA Loan Limits?
The FHA only insures mortgages of specific sizes. Its upper limits vary by region. The limits are commonly known as the FHA loan limits. The Federal Housing Finance Agency (FHFA) updates loan limits annually.
The FHA provides a loan limit table which you can use to check the maximum allowable loan size in your county.
Nationwide, the 2022 FHA loan limit is $420,680. In areas where the cost of living is higher than typical – such as San Francisco or Brooklyn – FHA loan limits are elevated to as high as $970,800.
FHA loan limits increase for 2-unit and multi-family homes.
This video describes FHA loan limits.
Get pre-approved for a mortgage today.
Types of FHA Loans
The FHA backs purchase loans and refinances for U.S. households. Since insuring its first mortgage in 1933, the agency has built a menu comprised of six different loan types. Each loan type solves a specific home buyer’s need.
1. FHA 203b Loan: Best For Buying A Home
FHA 203b loan is the official government name for the standard FHA-backed mortgage. 203b loans rarely get called by their proper name. Mortgage lenders, real estate agents, and everyone else calls them “FHA loans.”
The FHA 203b loan is the default mortgage option for FHA-backed buyers. It allows for a 3.5 percent down payment, flexible mortgage guidelines, and a low minimum credit score.
2. FHA 203k Renovation Loan: Best For Buying A Home That Needs Repairs
The FHA’s 203(k) renovation loan is a dual purchase + home improvement loan. It combines mortgage and home renovation costs into a 30-year fixed-rate mortgage with a single monthly payment.
The FHA 203(k) makes home repairs and construction more affordable for FHA-backed borrowers. The program is excellent for:
- Energy-efficiency improvements, including solar installation
- Repairing plumbing and electric systems
- Repairing or replacing a roof or gutters and downspouts
- Replacing damaged floors
- Improving landscaping and curb appeal
The FHA 203(k) removes health and safety hazards for ADA compliance.
3. HUD Homes Program: Best For Buying A Foreclosed Home
The FHA is a sub-agency within the U.S. Department of Housing and Urban Development (HUD). In 1968, HUD established a program to sell homes it acquired through foreclosure. The program, known as HUD Homes, sells foreclosed residential properties to the public at steep discounts.
Down payment requirements vary for buyers of HUD-owned homes. Some require the standard 3.5 percent of an FHA loan. Others allow down payments as low as $100.
Browse HUD homes for sale at HUDHomeStore.com.
4. Good Neighbor Next Door: Best For Public Service Professionals
Firefighters, educators, law enforcement officials, and EMTs can purchase HUD homes in low- and moderate-income areas at 50% off their list price through the Good Neighbor Next Door program.
Buyers are required to live in their homes for at least three years, except for members of the military who receive clemency for time spent on active duty.
5. The FHA Streamline Refinance: Best For Refinancing Without Paperwork
The FHA Streamline Refinance is the most straightforward, fastest mortgage refinance available to FHA-backed homeowners.
It doesn’t require any of the typical verifications associated with mortgage lending:
- No employment verification
- No income verification
- No asset verification
- No credit score check
- No home appraisal
To be eligible for the FHA Streamline Refinance, homeowners must show:
- 6-month history of on-time payments
- Proof that the new FHA mortgage will lower their monthly payments by five percent.
The FHA Streamline Refinance is a low-risk loan because it reduces the monthly payment for borrowers who already make on-time payments. In general, the default rate on FHA Streamline Refinances is lower than for FHA loans.
Before qualifying, you must have already completed at least six monthly payments on your existing loan.
6. FHA Cash-Out Refinance: Best For Refinancing To Get Cash
The FHA cash-out refinance lets homeowners replace their current mortgage with a larger one to convert home equity into spendable cash.
The FHA cash-out guidelines limit mortgage loan sizes to 80% of a home’s appraised value. Loan sizes must remain within local FHA loan limits. Homeowners may not cash out their refinance within the first 12 months of occupying a home.
7. The LIFT Act: Best For First-Time Home Buyers
The LIFT Homebuyers Act is a bill that uses FHA mortgages to help renters buy their first home.
The LIFT Act changes how mortgage payments are structured. Each payment contains more principal than usual, which reduces a homeowner’s balance more quickly. The LIFT Act targets first-time home buyers with FHA-eligible credit scores and low to moderate-income levels.
The LIFT Act has not yet passed into law, but when it is, buyers can use it in conjunction with other first-time home buyer programs like the First-Time Home Buyer Tax Credit of 2021 and the Downpayment Toward Equity Act of 2021.
Track the status of all of the government’s proposed first-time home buyer programs.
Comparing FHA Loans vs. USDA Loans
Since its start in 1934, the FHA program has supported affordable homeownership. The success of the FHA led to the creation of another government-backed mortgage program: the USDA loan.
USDA loans are mortgage loans backed by the U.S. Department of Agriculture to promote home affordability in suburban and rural census tracts.
USDA loans are 100% mortgages that require no down payment.s compared to FHA mortgage guidelines, USDA guidelines are more restrictive.
- USDA loans require a 640 credit score or higher
- USDA loans are limited to single-family homes
- USDA loans impose maximum income limits on homeowners
Additionally, USDA loans are only available to home buyers in low-density census tracts, as defined in this USDA eligibility map. 91% of the United States is USDA mortgage-eligible.
Here is a more detailed look at the differences between FHA loans and USDA loans:
|FHA Loan||USDA Loan|
|Homes everywhere||Homes in less-dense areas|
|3.5 percent down payment||No down payment required|
|No credit score minimum||Low credit score minimum|
|No income limitations||Moderate income limitations|
|Maximum loan size limitations||No maximum loan size|
Learn more about USDA loans.
Comparing FHA Loans vs. Conventional Loans
FHA loans should not be the default mortgage choice for first-time home buyers. If buyers have average credit scores or better, they should consider conventional home loans instead.
Conventional home loans are loans backed by one of two other government mortgage agencies, Fannie Mae and Freddie Mac.
Conventional mortgages are different from FHA loans because the government does not insure them. Conventional mortgages are backed by Wall Street and adhere to the most general of mortgage standards, so it’s no surprise that 82% of home buyers use conventional mortgage financing.
Conventional mortgage loans allow for more fixed-rate mortgage terms than FHA or USDA loans. They also allow more adjustable-rate mortgage terms. Home buyers can choose a 10-, 15-, 20, or 30-year fixed-rate mortgage; or a 3-, 5-, 7-, or 10-year adjustable-rate term.
There are also multiple three-percent down, low down payment mortgages available through conventional mortgage financing:
Here’s a comparison:
|FHA Loan||Conventional Loan|
|Minimum 3.5% down payment||Minimum 3% down payments|
|No credit score requirements||Minimum credit score threshold|
|Mortgage insurance mandatory||Mortgage insurance requirements based on down payment percentage|
|$420,680 for loan limit for a 1-unit residence||$647,200 loan limit for a 1-unit residence|
|Primary residence||Primary, second, and non-owner occupancy allowed|
The Benefits of Using FHA Loans
Since 1934, the FHA and its mortgage program have made homeownership affordable in all 50 states. FHA loan rules are inclusive and forgiving and contain protections not found in other mortgage loans.
Let’s look closer at some of the other benefits:
1. Allow Cash Gifts For a Down Payment
More than 10% of first-time home buyers receive cash gifts to help buy a home. The FHA’s mortgage rules for such gifts are the most lenient. The FHA is the only government agency that allows a home buyer’s entire down payment to come in the form of a gift. It’s also the only agency that lets cash gifts come from a friend. Some home buyers add down payment cash to their wedding and baby shower registries.
2. Lets Homeowners Assume Your FHA Mortgage If You Sell
FHA mortgages are assumable, which means that your home’s future buyer can purchase your mortgage from you along with your home too. Assumable mortgages make your home more affordable to others after mortgage rates rise. You can sell your 4% mortgage rate in a 10% mortgage rate market.
3. Gives Access to the FHA Streamline Refinance
FHA-backed homeowners get access to the FHA Streamline Refinance – the fastest, easiest way to lower your mortgage rate. When mortgage rates are down, homeowners can switch to lower-rate mortgages irrespective of their work status, money in the bank, or credit score. You don’t even need a home appraisal.
4. Offers Better Terms For Multi-Unit Homes
Unlike conventional mortgages, FHA mortgages don’t require home buyers to make a larger down payment or accept a higher interest when buying a 2-4 unit property. FHA mortgages allow 3.5 percent down regardless of property type.
5. Allows Others To Pay FHA Closing Costs
The FHA allows home buyers to negotiate with home sellers to contribute up to 6 percent of the purchase price toward closing costs, or $6,000 per $100,000. These are known as seller concessions and can get applied to real estate fees, loan costs, state and local taxes, and the cost of title insurance.
Our Advice – Consider an FHA loan if you haven’t already
Since 1933, the FHA 203b loans have made homeownership more affordable and accessible to Americans in all 50 states – it’s the original low-down-payment loan.
To check whether the FHA mortgage is best for you, start a pre-approval with Homebuyer and let a mortgage guide help you put your best foot forward.
Get pre-approved for a mortgage today.