The Ultimate & Best FHA Loan Guide (With Current Interest Rates)

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FHA loans aren’t just for first-time homebuyers. They’re a great option, whether you’re refinancing or have purchased many homes over your lifetime. In this detailed, yet straightforward guide, we’ll cover what you need to know to decide if FHA financing is right for you.

What is an FHA Home Loan?

An FHA loan is a government-backed mortgage funded by private lenders, but insured and regulated by the Federal Housing Administration (FHA).

Many people think FHA loans are just for first-time homebuyers, but you can take advantage of an FHA loan even if you’re refinancing or have purchased many homes over your lifetime.

FHA financing is attractive because of the competitive interest rates and low minimum down payments. The lending requirements also tend to be more flexible than many other mortgage options.

Having said that, FHA loans do come with certain limitations and costs. Maximum loan amounts vary based on the location of the property.

FHA also requires mortgage insurance on all loans, which helps protect lenders against default and enables lenders to offer higher loan-to-values than would otherwise be possible.

FHA loans are typically best for borrowers with limited credit, lightly bruised credit, or minimal cash for a down payment. If you have excellent credit, abundant income, and a large amount of cash for a down payment, conventional will probably make more sense for you.

The FHA also insures and regulates the home equity conversion mortgage (HECM), which is the most popular reverse mortgage in America.

FHA Mortgage Rates Today

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Many homeowners look to LendingTree to find lenders. Yes, you can find good lenders that way, but it’s not always the most enjoyable experience. Here’s more on the pros and cons of working with LendingTree.

FHA Loan Requirements

FHA loan requirements tend to be less stringent than other types of mortgage financing. If you have lightly bruised credit, credit scores in the 600s, or a bankruptcy, foreclosure, or short sale in the last few years, there’s still a good chance you’ll qualify for an FHA loan.

Here is a rundown of the most important FHA loan requirements to know:

  • Minimum credit score – FHA requires just a minimum credit score of 500, but most lenders will require at least a 580 to 620.
  • Maximum debt-to-income ratios – The standard maximum front-end debt ratio (which includes principal, interest, property taxes, homeowner’s insurance, and annual mortgage insurance) is 31%. The maximum standard back-end ratio (which also includes all other debt payments) is 43%. It’s sometimes possible to exceed these ratios with compensating factors such as savings, good credit, low loan-to-value, etc. I’ve gotten applicants approved with debt ratios as high as 55% before.
  • Occupancy – Owner-occupied only. Second homes and investment properties are not eligible unless you’re doing an FHA streamline refinance. We’ll cover more on that later.
  • Eligible property types – Single-family homes, townhomes, planned-unit developments (PUD), FHA-approved condos, 1-4 unit residential buildings, and manufactured homes built after June 15, 1976 are eligible. Your home doesn’t need to be perfect, but it should be in at least reasonably good condition with no major repairs needed. If you’re financing a condo, you can check the approval status of the condo complex here.
  • Upfront mortgage insurance (UFMIP) – FHA charges 1.75% of the loan amount for upfront mortgage insurance, which must be entirely financed or entirely paid in cash. UFMIP can be partially refundable for certain FHA refinances (more on those later).
  • Annual mortgage insurance (MIP) – FHA also charges annual mortgage insurance that ranges from 0.50% to 0.75% of the loan amount, depending on loan-to-value, loan amount, and loan term. MIP is split up into twelve installments that are paid as part of your monthly mortgage payment. Depending on the starting loan-to-value, MIP could apply for as long as 11 years or the life of the loan.
  • Maximum mortgage amount – The maximum loan amount varies depending on the FHA loan limit and the area where the property is located. You can look up the loan limits for your area here.
  • Employment history – Lenders will want to see that you’ve had steady employment in the same line of work for at least the last two years. If you’re a recent college graduate, you can use your time in school to fulfill the two-year requirement as long as your field of study is the same or similar to your current line of work.
  • Income documentation – If you’re a W2 wage earner, you’ll need to provide paystubs covering the most recent 30 days and W2s for the last two years. If you’re self-employed, you’ll need to provide personal and corporate tax returns (where applicable) covering at least the last two years.
  • Bankruptcy waiting period – FHA requires just a two-year waiting period from the discharge or dismissal of a Chapter 7 bankruptcy. This typically doesn’t apply to FHA streamline refinances (more on those later).
  • Foreclosure waiting period – FHA requires just a three-year wait after a foreclosure. This typically doesn’t apply to FHA streamline refinances (more on those later).
  • Loan products – All the usual loan products are available, including 30-year fixed, 20-year fixed, 15-year fixed and some ARM products.
  • Second mortgages – FHA loans are written only in first lien position. There is no such thing as an FHA-insured HELOC, home equity loan, or second mortgage.
  • Number of FHA loans – Unlike conventional loans, FHA will only insure one loan per borrower at a time. There is an exception for homeowners moving into a larger home, but it’s rarely used, in my experience.
  • Forbearance – If you’re refinancing, you must have completed the forbearance and made 12 consecutive monthly payments on your existing loan in the month due.

Now that we’ve cover the basic criteria that applies to most FHA loans, let’s cover some requirements that apply more specifically to purchase, full doc refinance, and streamline refinance transactions.

If you’d like to check out the full FHA lending requirements, you can find them here.

If you’re considering an FHA purchase loan, you may also want to check out a NACA loan. The application process is long and involved, but the loan terms are phenomenal and a great alternative to an FHA purchase loan.

FHA Purchase Loans

FHA loans are great for purchasing a home because of the low minimum down payments and flexible lending requirements.

If you have a limited credit history, lightly bruised credit, or bankruptcies, foreclosures, or short sales on your credit, it’s often much easier to qualify for an FHA purchase loan than a conventional purchase loan.

In addition to the criteria we’ve already covered, here are a few things to be aware of regarding purchase transactions:

  • Minimum down payment – The minimum down payment is 3.5% of the purchase price, but it’s always good to pay more if you can. If you put down at least 10%, you’ll get a break on the MIP and won’t have to keep it as long. If your credit scores are below 600, you may be required to put down at least 10% of the purchase price.
  • UFMIP paid or financed – The UFMIP premium must be entirely financed or entirely paid out of pocket as part of your cash to close.
  • Gift funds – You can use gift funds for your down payment and closing costs, provided you can document them and they’re from a close family member, friend, employer, labor union, or government agency that provides down payment assistance. The donor must provide a gift letter and there must be no expectation of repayment.
  • Interested party contributions – Sellers, real estate agents, builders, developers, or other parties with an interest in the transaction may contribute up to 6% of the sales price toward your origination fee, third-party closing costs, prepaid items, and discount points.
  • Cash to close – You’ll need to document the cash for your down payment and closing costs with bank statements that cover at least the last 60 days.

We recommend getting prequalified for a purchase loan before you start making offers. Most lenders are happy to provide a prequalification letter that you can provide to the seller to strengthen your offer.

If you plan to purchase a condo, make sure you run the address by your lender before you make an offer. Condos must be FHA approved to be eligible for FHA financing.

FHA Refinance Loans

There are two types of FHA refinance loans: a cash out refinance and a no cash out refinance. No cash out refinances are also commonly called rate/term or limited cash out refinances.

There are several FHA refinance loans available, including the FHA no cash out refinance, FHA simple refinance, FHA streamline, and the FHA cash out refinance. You can find more information about these options below.

FHA No Cash Out Refinance

The FHA no cash out refinance is a great fit for homeowners refinancing a non-FHA loan or want to consolidate junior loans (such as a HELOC or home equity loan) into one payment as part of a refinance.

Click the link below to learn how it works and when it’s potentially a good fit.

Learn more about the FHA No Cash Out Refinance

FHA Streamline Refinance

The FHA streamline is an FHA-insured refinance transaction designed to help homeowners with an FHA mortgage quickly and easily reduce their interest rates and monthly payments.

Streamlines are easy to qualify for and typically require very little paperwork.

Learn more about the FHA Streamline Refinance

FHA Simple Refinance

The FHA simple refinance is an FHA-insured refinance transaction designed to reduce interest rates and monthly payments for homeowners who already have an FHA mortgage.

The FHA streamline refinance is the most popular rate/term FHA refinance, but there are some unique situations where the simple refinance can make sense.

Learn more about the FHA Simple Refinance

FHA Cash Out Refinance

The FHA cash out refinance enables you to convert home equity into cash with credit scores as low as 500.

Homeowners commonly use the proceeds to pay off other debt, do home improvements, build up savings, pay for college tuition and expenses, or invest in a business. You can use the cash for whatever you need.

Learn more about the FHA Cash Out Refinance

If you’re refinancing for cash out, you’ll need to have well over a 20% equity position in your home for it to make sense. If you already owe close to 80% of the value of your home, there probably won’t be enough room in the loan to pay off your existing loan, pay closing costs, and give you a significant amount of cash out.

Pros and Cons of FHA Mortgages

Like anything, there are pros and cons to using FHA financing. If you have lightly bruised credit and/or credit scores in the 600s, FHA will probably make more sense than a conventional loan.

However, there are some costs and requirements you should be aware of. We’ve covered this ground already, but let’s sum it all up in a list of pros and cons.

FHA Financing “Pros”

  • Competitive interest rates – Interest rates for FHA mortgages tend to be lower than comparable conventional mortgages.
  • Low minimum down payment – The minimum down payment is just 3.5% of the purchase price.
  • Low minimum credit scores – Minimum credit scores are 500, but most banks will require you to have at least a 580 or 600 qualifying score. The exception is FHA streamline refinances, which typically don’t require a minimum credit score.
  • More flexible income requirements – Income and debt-to-income ratio requirements are more flexible than conventional financing.
  • Shorter bankruptcy waiting period – FHA requires just a two-year waiting period from the discharge or dismissal of a Chapter 7 bankruptcy. Standard Fannie Mae conventional guidelines require a four-year wait.
  • Shorter foreclosure waiting period – FHA requires just a three-year wait after a foreclosure. Standard Fannie Mae conventional guidelines require a seven-year wait.
  • Competitive interest rates – FHA interest rates are usually lower than comparable conventional interest rates.
  • FHA streamline refinance – If interest rates fall, you can do an FHA streamline refinance. Streamlines are fantastic because they required very little paperwork. Income documentation, appraisals, and sometimes even credit reports aren’t required.
  • Cash out option refinance – If home values increase, you can borrow from your home equity with an FHA cash out loan (also sometimes called a FACOP loan). Homeowners commonly use an FHA cash out loan to consolidate debt or do home improvements.
  • Variety of loan products – The usual loan products are available, including 30-year fixed, 20-year fixed, 15-year fixed, and some ARM products.
  • Widely available – FHA loans were less common in the past than they are today. These days, pretty much any major mortgage lender offers them. This gives you a lot of options to choose from to make sure you’re getting the best deal.

FHA Financing “Cons”

  • Upfront mortgage insurance (UFMIP) – FHA charges 1.75% of the loan amount for mortgage insurance, which must be entirely financed or entirely paid in cash. UFMIP is often partially refundable for certain FHA refinances.
  • Annual mortgage insurance – Annual mortgage insurance is similar to conventional private mortgage insurance (PMI), but it’s usually more expensive and you typically will pay it longer than PMI.
  • Condominiums – It can often be difficult to get FHA financing for condos.
  • Property condition – FHA guidelines tend to be pickier with regard to property condition than conventional guidelines.
  • Owner-occupied only – Second homes and investment properties not allowed unless you’re doing a streamline refinance.
  • Only one FHA loan at a time – If you already have an FHA mortgage, you’ll likely need to pay it off before getting a new FHA loan.
If your credit scores are 650 or higher and the new loan amount will be less than 80% of the value of your home, you may also want to check into a conventional loan. The conventional loan interest rate will probably be higher than the FHA loan rate, but it may still be a better deal because you won’t be paying the annual mortgage insurance.

Frequently Asked Questions

What is an FHA loan and who qualifies?

An FHA loan is a government-backed mortgage funded by private lenders, but insured and regulated by the Federal Housing Administration (FHA). Many people think FHA loans are just for first-time homebuyers, but anybody can take advantage of FHA financing, whether they’re refinancing or have purchased many homes over their lifetime.

What are the disadvantages of a FHA loan?

FHA loans are great, but the biggest disadvantage is the mortgage insurance, which is expensive compared to the private mortgage insurance that sometimes applies to conventional loans. You’ll have to pay an upfront mortgage insurance premium at closing (which can usually be financed) and an annual premium as part of your mortgage payment. FHA interest rates tend to be lower than comparable conventional interest rates, which helps compensate for the mortgage insurance.

How hard is it to get a FHA loan?

FHA loans are typically easier to qualify for than other types of mortgage financing. The lending requirements for credit score, income, employment, and debt-to-income ratio are often more flexible than for conventional loans.

Is it a good idea to get a FHA loan?

Absolutely! FHA financing is 100% legitimate and often easier to qualify for than conventional financing. Many people think FHA loans are just for first-time homebuyers, but anybody can take advantage of an FHA loan, whether they’re refinancing or have purchased many homes over their lifetime. If the loan provides genuine benefit, then it probably makes sense for you.

What is the downside of an FHA loan?

FHA loans are great, but the biggest downside is the mortgage insurance, which is expensive compared to the private mortgage insurance that sometimes applies to conventional loans. You’ll have to pay an upfront mortgage insurance premium at closing (which is usually financed, however) and an annual premium as part of your mortgage payment. FHA interest rates tend to be lower than comparable conventional interest rates, which helps compensate for the mortgage insurance.
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About Mike Roberts

Mike Roberts is the founder of MyHECM.com, a published author, and a highly experienced mortgage industry veteran with over a decade of mortgage banking experience. When he's not working, he enjoys spending time with his family, skiing, camping, traveling, or reading a good book. Roberts is the author of The Reverse Mortgage Revealed: An Industry Insider’s Guide to the Reverse Mortgage, which is available on Amazon.