FHA Loans: Complete Guide for First-Time Homebuyers

March 26, 2020 Loans & Finance

FHA mortgage loans are a great option for first-time homebuyers since they have low interest rates and lower credit requirements than other mortgages. They also require just a 3.5% down payment for buyers who qualify.

Here’s what you should know about FHA loans:

  • What is an FHA loan?
  • There are different types of FHA loans
  • FHA loan limits for 2020
  • How to get an FHA loan
  • FHA loans vs. conventional: Which one is best?

What is an FHA loan?

An FHA loan is a mortgage that is insured by the Federal Housing Administration, a government agency that sets standards for how homes are constructed and financed in the U.S.

When a mortgage is FHA-insured (also referred to as FHA-backed or FHA-guaranteed), it means that in the event of a foreclosure, the FHA will step in and cover part or all of the lender’s financial losses. Because of this added protection, these loans come with low interest rates and lower down payment requirements.

To be eligible for an FHA loan, you’ll need to meet the borrower requirements, which include a credit score of at least 500 and a down payment of 3.5% to 10%.

There are different types of FHA loans

Broadly, FHA loans come in fixed-rate or adjustable-rate options. A fixed-rate loan offers a consistent interest rate the entire time you have the loan, whereas, an adjustable-rate mortgage has an interest rate that can fluctuate.

But there are also FHA mortgage programs for specific purposes. These include:

  • 203(b) loans: These are what most people think of when talking about FHA loans. They’re used to either purchase or refinance a home and require down payments as low as 3.5%.
  • 203(k) loans: Also called 203(k) Rehabilitation mortgages, these loans are designed for both buyers and existing homeowners, allowing them to finance eligible home repairs and improvements.
  • EEM loans: Energy Efficient Mortgages help homeowners finance home improvements that reduce energy use on the property. They can be used to purchase a home and improve it all at once or to improve a home you already own.
  • HECMs: Home Equity Conversion Mortgages are more commonly known as reverse mortgages. They’re designed for homeowners over the age of 62, allowing them to turn their home’s equity into a form of income.

For existing homeowners who already have FHA loans, there is also the streamline refinance. This is a sped-up refinance option that requires little financial documentation. You also might not need a credit check for this type of loan.

Check Out: These States Help People With Student Loan Debt Buy A House

FHA loan limits for 2020

FHA limits increased at the beginning of 2020 and now range from $331,760 in low-cost regions to $765,600 in higher-cost areas.

In an affordable market like Harris County, Texas, for example, buyers can get an FHA loan up to the $331,760 limit — what FHA calls the “floor.” In a market that’s higher priced like Los Angeles, buyers can borrow up to the FHA’s “ceiling” — the $765,600 limit.

There are also different limits for borrowers purchasing two-unit, three-unit, and four-unit properties, maxing out at $1,472,550 (the highest amount allowed for four-unit properties in high costs areas).

How to get an FHA loan

Not all mortgage lenders offer FHA loans, so the first step is to find one who does. Once you’ve done that, you’ll need to:

  1. Get pre-approved: The mortgage pre-approval process varies depending on the lender or platform you use, but typically involves filling out some basic information.
  2. Fill out the lender’s loan application and submit to a credit check: This process is a bit more detailed than a pre-approval. For example, you might need recent pay stub and bank statement information to fill out the application accurately.
  3. Provide financial documentation: This should include your recent pay stubs, W-2s, tax returns, bank account statements, and more. Your loan officer will tell you the exact documents you’ll need to provide.
  4. Wait for your property appraisal: This ensures your home is worth the amount of money you’re looking to borrow for it. The appraiser will also check to ensure the property meets FHA construction guidelines.
  5. Keep in touch with your loan officer: As your mortgage is processed and underwritten, your loan officer might need additional paperwork along the way, so keep in contact with your loan officer to ensure everything is in order.
  6. Attend your closing appointment: This includes paying your closing costs and down payment as well as getting your keys.
Tip: Credible doesn’t offer FHA loans through our platform, but The Department of Housing and Urban Development offers a handy tool for finding FHA lenders in your area which is a good place to start looking.

Learn: How to Buy a House

FHA loans vs. conventional: Which one is best?

FHA loans are typically better-suited for lower-credit and first-time homebuyers, while conventional loans are a good fit for high-credit borrowers or real estate investors. Here’s a look at how the two types of mortgage loans compare:

  FHA loans Conventional loans
Credit score 500 minimum 620 to 620
(depending on lender)
Down payment 3.5% to 10% minimum
(depending on credit score)
3% minimum
Mortgage insurance
  • Always required
  • Upfront and annual fees
Usually required when the down payment is under 20%
Loan limits
  • $331,760 (low-cost area)
  • $765,600 (high-cost area)
  • $510,400 (low-cost area)
  • $765,600 (high-cost area)
Property requirements
  • Must meet FHA construction standards
  • Must be your primary residence
Can be used for primary residence, second home, or investment property

The best type of home loan really depends on your budget, goals for the property, and your credit score. If you’re still not sure what loan is best suited for your home purchase, Credible can help you compare many mortgage options.

Credible makes getting a mortgage easy
While Credible doesn’t offer FHA loans, it’s a good idea to compare offers in case you qualify for FHA-comparable rates.

  • Actual personalized rates: In 3 minutes, get actual prequalified rates without impacting your credit score
  • Smart Technology: We streamline the questions you need to answer and automate the document upload process
  • End-to-end experience: Complete the entire process from rate comparison to closing all on Credible

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