FHA Loan Criteria

Pros and Cons of a FHA Loan

An FHA-insured loan is a guarantee program offered by the government to help consumers qualify for a home mortgage. The homebuyer applies for the mortgage through a local lender and then the mortgage is backed by the FHA, giving the lender a guarantee that the loan will be repaid by FHA if the borrower defaults on the loan.

FHA-insured loans are used by both first time homebuyers, as well as seasoned homebuyers. They can also be used to refinance a loan that is not currently guaranteed by the FHA.

Pros

• Lower Credit Criteria – Credit criteria is not as strict as a conventional loan.
• Easier to Qualify – Income and credit requirements are usually less than those required to quality for a conventional loan.
• Low Down Payment – Down payments as low as 3 percent are acceptable and the funds can come from family members.
• Lower Monthly Mortgage Insurance Payment – The overall cost of mortgage insurance is less since the loan is insured by the Federal government.
• Loans Are Assumable – A homebuyer can take over a FHA loan without the cost of having to obtain a new loan.

Cons

• Limited Loan Size – Loan floor and ceiling limits are set based on the median house price by geographic area. Loan limits are reviewed annually.
• Mortgage Insurance Premium – Monthly payment is increased slightly.

FHA Loan Criteria

FHA loan criteria vary between different types of FHA loans:

• Fixed Rate (FHA 203b)
  • Standard fixed rate loan
  • 1 to 4 unit structure
  • Owner-occupied
  • Minimum down payment of 3%
  • Mortgage limits vary by geographic area.
• Rehabilitation Mortgage (FHA 203k)
  • Home improvement loan of up to $35,000 for the repair of single family properties.
  • Can be used to purchase a dwelling and land. The mortgage must be a first lien on the property.
• Condominium Loan (FHA 234c)
  • For dwellings in detached, semi-detached, garden-type, low-rise or high-rise buildings.
  • Project must be on HUD's approved condominium list.
  • Eighty percent of the HUD-insured mortgages in a condo project must be occupied by the owners.
  • Minimum down payment of 3%
• FHA Adjustable Rate Mortgage (FHA 251)
  • Standard one year ARMs
  • 1 to 45 unit homes as well as condos and town homes
  • Borrowers must qualify based on the initial rate plus one percentage point
• FHA Hybrid adjustable ARMs
  • One year, three year, five year and ten year ARMs
  • Borrowers only need to quality based on the initial rate of the loan
• FHA 2-1 BuyDown
  • Buyer can reduce the initial rate on their mortgage by 2 percent the first year, 1 percent the next year and 0 percent every year thereafter.
• Energy Efficient Mortgage (EEM) Program
  • For new and existing properties
  • 1 to 4 unit structure
  • Borrower makes 3 percent cash investment in the property.
  • Provides funds for owner to make energy-efficient improvements up to 5 percent of the property's value or $4,000.
  • Maximum Mortgage limits vary by geographic area.

Contact your local city offices to see if there any local home buying programs in your area using HUD-insured loans such as the Good Neighbor Next Door program.

2008 Economic Growth Package

In March 2008 The Economic Stimulus Act of 2008 was signed into law. This Act temporarily increases the FHA loan limits throughout the United States. This temporarily program allows homebuyers in certain areas to qualify for FHA loans up to $729,750. This program was enacted to encourage homeowners to focus on 30-year fixed rate mortgages instead of lower rate adjustable rate loans that were experiencing rising default and foreclosure rates. In January 2009 FHA's maximum loan limit is projected to return to $362,790.

Finding Local HUD Information

HUD-approved assistance is available throughout the United States:

• Lenders can be located by searching the HUD Lender List
• Counseling Agencies can provide consumers with advice on home buying, renting, foreclosures and reverse mortgages.