What Is An FHA Loan? Limits, Requirements And More
Lauren Nowacki7-Minute Read
November 03, 2020
As you review the different types of mortgages available for buying a home, you may wonder if the FHA loan is the best option for your situation. Since this is a big financial decision, you’ll want to know as much as you can about the loan, its requirements and how you can qualify.
What Is An FHA Loan?
An FHA loan is a mortgage that’s insured by the government, specifically the Federal Housing Administration, or FHA. That means the government will protect the lender’s investment against default, which makes qualifying for the loan easier. The loan is a popular option for first-time home buyers and those with low-to-moderate incomes, due to its lower credit score and down payment requirements.
To get an FHA loan, you’ll need to work with an FHA approved lender and meet the eligibility requirements of the loan.
FHA Loan Eligibility Requirements
To be eligible to receive an FHA loan, you must meet the following eligibility requirements:
- You must have a minimum credit score of 580
- Your minimum down payment must be at least 3.5%.
- Your maximum debt-to-income ratio can be as high as 50%; however, your DTI requirement will depend on your location and credit score. In many cases, the maximum DTI requirement is lower than 50%.
- The property must meet all FHA guidelines to be approved for the loan.
Along with these requirements, you must also have enough money to pay the closing costs and upfront mortgage insurance premium (MIP), if it is not rolled into the loan.
Is An FHA Loan A Good Fit For Me?
The FHA loan has lower credit score and down payment requirements, which helps people with low credit scores, higher amounts of debt or limited savings get the financing they need to purchase a home. If you fall into any of those categories and you’re having a hard time qualifying for other loans, the FHA loan may be a better fit for you.
If you’ve had financial hardship in the past, the FHA loan may be the way to go. You may be able to still qualify for this type of loan even if you have bankruptcy or other issues in your financial history. However, you’ll need to have a steady employment history.
Five Types Of FHA Loans
There are several types of FHA loans. Here are the five common loan types:
While Rocket Mortgage® doesn’t offer all of the different types of FHA loans listed above, the FHA loans offered are available with fixed or adjustable rates and for 15-, 25- or 30-year terms.
FHA Loans And Mortgage Insurance Premiums
Regardless of your down payment, you will be charged an upfront MIP and monthly MIP. This helps protect the lender from loss.
The upfront MIP is 1.75% of the loan amount and is due at closing. You can choose to pay the amount at closing or have it rolled into the loan amount to pay it over time.
The monthly MIP is due each month with the rest of your mortgage payment and typically costs between 0.45% – 1.05%. The amount you pay depends on the loan amount, your down payment and the length of your loan term.
Your down payment also influences how long you pay the MIP. If your down payment is less than 10%, the MIP will stay on for the life of the loan. If your down payment is 10% or more, the MIP will drop off after 11 years.
The only other way to get rid of your MIP is to refinance your loan to a conventional mortgage once you have enough equity in the home.
FHA Loan Limits
FHA loan limits are the maximum amounts you can borrow with an FHA loan, and they vary by county. There are low-cost areas, which have the “floor” limit and high-cost areas, which have the “ceiling” limit. There are also areas that fall between these limits.
As of 2020, the floor limit is $331,760 and the ceiling limit is $765,600.
These are the limits for one-unit properties. Multiple-unit properties may have higher limits. To find the FHA loan limits in your area, visit the FHA Mortgage Limits page.
What Are The Differences Between An FHA Loan And A Conventional Loan?
When buying a home, these are the two most common loan options you’ll come across. From eligibility requirements to loan limits and mortgage insurance, there are a few key differences between the two loans. Here are some of the most significant ones to consider when choosing between an FHA loan and a conventional loan.
Will I Save Money With An FHA Loan?
Whether you’ll save more money with an FHA loan than a conventional loan will depend on the mortgage insurance premiums.
For example, if you can put 20% down, you’ll likely save more with a conventional loan because you will not have to pay any mortgage insurance. With an FHA loan, you have to pay an upfront MIP and monthly MIP even if you put 20% down. And if you put less than 10% down, you’ll pay the monthly MIP for the life of the loan. With a conventional loan, even if you put less than 20% down, you can get rid of the mortgage insurance once you have 20% of equity in the home. With an FHA loan, you can’t get rid of mortgage insurance for at least 11 years – and that’s only if you put at least 10% down.
Are There Drawbacks To An FHA Loan?
There are a few drawbacks to the FHA loan that you should consider before applying for the loan.
- The property must meet stricter FHA guidelines to be approved. Because of this, some sellers won’t accept FHA loans.
- The loan amount cannot exceed the FHA’s loan limits for your area.
- The loan is only available for primary residences.
- Mortgage insurance premiums can remain for the life of the loan.
- To get this type of loan for a condo, the property must be an FHA-approved condo.
When Is It A Bad Idea To Take Out An FHA Loan?
Getting an FHA loan can make sense for many people, but here are some instances when using this type of loan is a bad idea or impossible to do:
- You don’t have enough money to pay the required down payment, upfront MIP or closing costs.
- You’re unable to afford the monthly premiums.
- You want to purchase an expensive property that exceeds the loan limits.
- You want to purchase an investment property or second home.
Can I Get Relief On An FHA Loan?
If you were affected by an event that the president declared a disaster and are unable to make your mortgage payments, you may qualify for disaster relief. This relief may include a 90-day delay in foreclosure or the lender may waive late fees.
In the case of COVID-19, the Coronavirus Aid, Relief and Economic Security (CARES) Act has provided two protections for FHA loan borrowers. Lenders cannot foreclose on homes until at least December 31 and homeowners may request forbearance up to 180 days. Lenders are also helping their clients. Learn more about Quicken Loans mortgage assistance and client resources for COVID-19.
FHA loan borrowers looking for relief on any other ordinary day – when there isn’t a disaster – may be able to find assistance in other government programs. The FHA Home Affordable Modification Program (HAMP) allows homeowners to reduce their monthly mortgage payments by modifying their FHA mortgages. Among other eligibility requirements, you must complete a trial payment plan to participate in this program.
What Are The Current FHA Loan Rates?
To check out today’s FHA mortgage rates, visit the current rates page on Rocket Mortgage®. On this page, you’ll be able to view and compare interest rates for other types of loans and review rate changes from the day before and the year prior.
Where Do I Start?
You’ve taken the first step by learning more about the loan. The process for getting the loan is relatively simple. You’ll apply for mortgage preapproval, have your assets, finances and other personal information verified and have your loan approved and ready to close.
It’s important to know what lenders are looking for before you apply. They’ll want to make sure you have a stable income and other assets available to ensure you’ll be able to pay your loan. They’ll likely ask for proof of income, assets and liabilities and also check your credit history. Be prepared ahead of time to ensure a smooth process.
If you need help finding a home and putting in the offer, a verified, local Rocket HomesSM Partner Agent can help.
For more information on purchasing a home, check out the Rocket HomesSM Home Buyer's Guide.
Table of Contents
What’s An FHA-Approved Condo?
An FHA-approved condo can be purchased with an FHA loan and meets HUD’s property eligibility requirements. Learn how to find an approved condo here.
Should You Rent Or Buy?
Understanding the pros and cons of the rent versus buy conundrum and how they relate to your particular situation can give you confidence in whatever path you choose.