Do you dream of owning a house as grand as the White House?
Well, hold on tight because, with an FHA loan, those dreams can become a reality!
In this comprehensive guide, we spill the beans on everything you need to know about buying a house with an FHA loan.
From eligible properties to requirements you should meet, and the $100 down payment program offered by the FHA.
So, buckle up, and let’s deep dive!
What Are FHA Loans?
Skip over if this isn’t new to you. But just so we’re on the same page, we’ll explain what an FHA loan is before diving into other nitty-gritties.
An FHA loan is a mortgage backed by the Federal Housing Administration that allows you to buy a home with a lower down payment and lower credit score than a conventional loan.
They have more flexible requirements for income, debt-to-income ratio, and employment history which makes them a great option for anyone looking to become a homeowner with limited funds for a down payment.
These requirements determine how much you qualify for, which in turn determines which house you can buy with your FHA loan.
What Homes Qualify for an FHA Loan?
Having received pre-approval on your FHA loan and a fair idea of your budget, it’s time to decide which home you want to buy. That is if you don’t already have a particular house in mind, which is rarely the case.
Here are the types of homes that qualify for an FHA loan to choose from:
- Condominiums: Condos qualify for FHA loans if they are on the list of FHA-approved condos. The condos must meet other specific requirements and must be well-run.
- Fixer-uppers: FHA loans can be used to purchase fixer-upper homes that require renovation or repairs. You can utilize a 203(k) loan to finance both the purchase of the home and the cost of repairs or renovations.
- Mobile homes: FHA loans can be used to buy mobile homes that meet specific standards. The home must be on a permanent foundation, and you must own the land on which the home sits or have a long-term lease on the land.
- Multi-unit properties: FHA loans can also be used to purchase multi-unit properties, such as duplexes, triplexes, and quadplexes. You can live in one unit and rent out the others, which can help offset their mortgage payments.
- Single-family homes: Most commonly, FHA loans are also used to buy single-family homes. These homes sit on their own lots and don’t share walls with neighboring homes.
Which Homes Are Disqualified From FHA Loans?
The list of approved loans for an FHA loan seems like a tall and exhaustive list but not all homes qualify to be financed by an FHA loan.
Here are the exceptions:
- Co-op units: Co-op units, which are owned by a corporation and allow you to own shares in the corporation, are not eligible for FHA loans.
- Flipped homes: A flipper is a home that has been bought and quickly resold for a profit. If a home has been owned for less than 90 days, it doesn’t qualify for an FHA loan.
- Investment properties: FHA loans are designed for primary residences only, so any property not intended to be a primary residence is disqualified. This includes investment properties, rental properties, and vacation homes.
Between financing your home with an FHA loan or a conventional loan. Here are some unique differences:
| Property Requirements | FHA Loan | Conventional Loan |
|---|---|---|
| Minimum Property Standards | Must meet FHA’s minimum property standards | Must meet lender’s property condition requirements |
| Appraisal Requirements | FHA appraisal required, must meet FHA guidelines | Conventional appraisal required, must meet lender’s guidelines |
| Property Type Eligibility | Eligible for 1-4 unit properties, including condos and manufactured homes (must meet FHA guidelines) | Eligible for various property types, including condos and manufactured homes (must meet lender’s guidelines) |
| Repair/Improvement Requirements | Repairs required for safety and habitability issues identified in FHA appraisal | Repairs required as per lender’s appraisal, if any |
| Property Condition Considerations | More lenient on property condition, may allow for minor repairs after closing | Stricter on property condition, may require repairs prior to closing |
| Property Value Limitations | Maximum loan limits set by FHA based on location | No maximum loan limits, but may be limited by lender guidelines |
Can You Get A HUD Home with an FHA Loan?
Yes, you can get a HUD home with an FHA loan.
A HUD home is a property that was acquired by HUD as a result of a foreclosure on an FHA-insured mortgage. These homes are owned by the HUD and are sold via an online auction process or by a real estate agent.
One option for buying a HUD home with an FHA-insured loan is via the FHA $100 Down Payment Program, more on this below. This program allows you to buy a HUD home with a down payment of only $100 if you meet the qualifications.
It is an attractive offer if you’re a first-time homebuyer or have limited cash for a down payment. To qualify, you must meet requirements such as:
- The property must be a HUD-owned property listed under the program.
- You must be buying the property as your primary residence.
- You must meet the FHA’s underwriting and credit qualifications.
FHA $100 Down Loan Program
The FHA (Federal Housing Administration) $100 Down Loan Program is a unique program offered to homebuyers looking to buy homes with a low down payment.
This program makes homeownership more accessible to low- and moderate-income individuals and families who may not have the funds for a larger down payment.
Under this program, you’re only required to put down $100 as a down payment, making it one of the most affordable options if you’re a first-time homebuyer.
The $100 can be sourced from personal funds or gifts from family members, friends, or not-for-profit organizations.
FHA 100% Financing
FHA loans do not offer 100% financing.
You must provide a down payment, although the amount required is typically lower than what a conventional loan requires. The least down payment required for an FHA loan is 3.5% of the home’s purchase price.
In addition to the down payment and closing costs, you must also have enough cash to cover other expenses associated with owning a home, such as
- HOA (Homeowners Association) fees
- Homeowners Insurance
- Maintenance costs
- Property taxes
- Upgrades and renovations
Note that the FHA offers a refinancing option that does not require a down payment. These FHA refinance loans help you lower your monthly payments, reduce interest rates, or shorten the loan term.
Frequently Asked Questions
Can I use an FHA loan to buy a fixer-upper?
Yes, you can use an FHA loan to buy a fixer-upper, but you must pick the right type of FHA loan for this purpose. The FHA offers several loan options for home buyers, including an FHA 203(k) loan specifically designed for purchasing and renovating a fixer-upper property.
There are two types of 203(k)s:
- The limited FHA 203(k) loan: This FHA 203 (k) loan is for minor repairs and upgrades that do not exceed $35,000.
- The standard FHA 203(k) loan: This FHA 203(k) loan is for significant renovations and requires a licensed contractor.
How can I find info on FHA-approved lenders?
Here is how you can find info on FHA-approved lenders:
- FHA Connection: FHA connection is an online system that allows approved lenders to access FHA loan programs and submit loan applications. You can use the FHA Connection portal to search for approved lenders.
- HUD’s Lender List: The HUD (Department of Housing and Urban Development) also has a list of approved FHA lenders on its portal.
- Mortgage Brokers: Mortgage brokers work with various lenders and can help you find an FHA-approved lender that meets your needs.
If you’re looking to finance a house in these locations through an FHA loan, we can be your lender.
How hard is it to get an FHA loan?
The difficulty level of getting an FHA loan varies depending on factors such as DTI ratio income, and employment history. However, FHA loans are generally easier to qualify for than conventional loans due to their lower credit score and down payment requirements.
To obtain an FHA loan, you must meet the basic eligibility requirements, including a valid SSN (Social Security Number), lawful residency in the United States, and a steady income.
What are the advantages of using an FHA loan to purchase a home?
The benefits of buying a home with an FHA loan include:
- Flexible credit requirements: FHA loans are more forgiving of past credit problems than traditional mortgages. If you have a credit rating of 580, you may qualify for an FHA loan with a 3.5% down payment. Even if your credit rating is under 580, you may still be able to get an FHA loan, but you need a down payment of at least 10%.
- Low down payment: You can purchase a home with a down payment as low as 3.5% of the purchase price. This means you don’t need to have a large amount of cash saved to become a homeowner.
- Lower interest rates: Because the government backs FHA loans, they typically have lower interest rates than conventional loans. This can save you thousands of dollars over the life of your loan.
What are the disadvantages of using an FHA loan to purchase a home?
The drawbacks of buying a home with an FHA loan include:
- Loan limits: FHA loans limit how much you can borrow, which varies depending on where you live. This means that if you’re looking to buy a higher-priced home, you may not be able to use an FHA loan.
- MIPs (mortgage insurance premiums): All FHA loans require MIPs which can raise your monthly payment. This insurance protects your lender in case you default on your loan.
- Property requirements: FHA loans have specific property requirements that must be met for the loan to be approved. For instance, the property must be your primary home and must meet specific safety and soundness standards.
So, Which Do You Buy?
While many types of homes, such as single-family and multi-unit properties, qualify for an FHA loan, only some houses are eligible.
To decide which home best fits your financial situation, consider its affordability, condition, and resale potential after you’re sure they meet FHA’s eligibility.
If you’d like to learn more about the process of acquiring a home using an FHA loan, feel free to contact us. We’re only here to ensure your homeownership dream stays on course.
