FHA Tips

Whether you already think an FHA loan is right for you or are still trying to figure out what you need, we’ve translated the FHA handbook into a quick reference guide. These tips will help you make smart, informed choices.

What are FHA loans?


FHA loans are mortgages insured by the Federal Housing Administration. Borrowers can make down payments as low as 3.5% and have credit scores as low as 500 under certain circumstances. These loans are good options for people with limited savings and less than perfect credit scores. Important note: Only approved lenders can issue FHA loans.

The FHA was established in 1934 as part of the National Housing Act. The intention was to reverse the Great Depression foreclosure crisis when half of American homeowners found themselves in default. It opened up the possibility of home ownership for many Americans by accepting 20% down payments instead of the 50% - 60% down payments that had been previously required.

Today the FHA insures loans for about 8,000,000 Americans.

Types of FHA loans

The FHA offers various packages for borrowers, from basic single family home loans to specialized products designed to meet specific needs. The following is an overview of FHA loan types:

1. 203b - Basic Home Loan. Different types of homes are eligible. Fixed rate or adjustable rate loans are offered.
2. 203k - Rehab Loan. This loan rolls the cost to purchase and renovate a home into one mortgage. Purchase and refinancing options are available.
3. EEM - Energy Efficient Loan. Allows energy efficient upgrades in home purchase or refinance. New and existing homes qualify.
4. Title 1 Property Improvement Loan. For a manufactured home purchase or existing home repairs.

How do FHA loans compare to conventional loans?

Conventional loans aren’t guaranteed by the federal government. They are harder to qualify for than FHA loans.

  • Borrowers can get FHA loans with lower credit scores than required for conventional loans. In some cases the monthly mortgage insurance payments may be lower.

  • The FHA is more lenient when it comes to making down payments with gifts from family members, charitable organizations, and employers.

  • FHA loans may require closing costs that conventional loans don’t.

How do you qualify for FHA loans?

There are a number of minimum requirements that must be met before FHA loan approval. Important note: Lenders may have additional requirements in order to approve an FHA loan. It's a good idea to shop around so you can compare offers.

Down payment and credit scores

You’ll need a credit score of 580 or higher if you want to make the minimum 3.5% down payment. If your score is 500 to 579, a 10% down payment will be required. If your score is below 500, you won’t be eligible for an FHA loan. In this case, you’ll have to work on improving your scores before shopping for a house.

The FHA allows borrowers to use financial gifts to help make down payments. You’ll need a letter from the donor that includes contact information, their relationship to you, the amount of the gift, and a statement that no repayment is required.

Note: Because of the COVID pandemic, many FHA lenders are requiring higher credit scores (620 is not unusual) than the FHA’s acceptable scores.

Debt-to-income ratio

Your monthly debt payment cannot exceed 50% of your gross income (income before taxes are taken out) to meet FHA’s debt-to-income requirements. If you have a deferred student loan, the underwriter will add 1% of the total amount to your monthly payments.

Mortgage insurance premium (MIP)

Mortgage insurance is a requirement for every FHA loan. You’ll be required to make an upfront payment of 1.75% of the loan amount at closing. This payment can be rolled into the loan. A premium in the amount of 0.85% of the loan amount will be added to your monthly mortgage payments.

If you make a 3.5% down payment, you will have to pay the monthly premiums for the life of the loan. If you make a 10% down payment, you can eliminate the premium payment after eleven years.

Property Approval

The FHA has minimum standard property requirements that must be met before loan approval. Whether you’re buying a single family house, a condo, a manufactured home, or a multiple family dwelling, it will have to be appraised to ensure it’s worth the money you’re borrowing. Appraisals look at safety and livability factors. They are not the same as home inspections.

If you’re applying for a 203K renovation loan, the FHA requires two separate appraisals: one on the property in its “as is” condition and another in its “after improvements” state.

How do you apply for an FHA loan?

You will need personal and financial documentation to apply for an FHA loan. They will include, but not be limited to, the following:

  • Your Social Security number

  • Proof of citizenship, permanent residency documents, or proof you are eligible to work in the United States.

  • The lender may pull some of the documents you need, like tax returns, employment records, and credit reports.

What are FHA interest rates?

FHA rates vary according to the amount of the loan, the amount of your down payment, your credit score, where in the country you live, and other factors.

Here is an example of the FHA rates you can expect according to NextAdvisor:

Purchase price: $200,000
Down payment: 3.5%
Loan Amount $194,000
Credit score: 700 - 719
Terms: 30 year fixed
APR: 3.34%
Rate: 2.49%
Monthly Payment: $766
Fees: $4,605

According to Bankrate, on July 19, 2021, the average rate for a 30 year FHA mortgage was 2.630% with a 3.520% APR. The average 30 year FHA refinance rate was 2.660% with a 3.550% APR.