Suzette Friberg

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An FHA loan is a government-backed mortgage insured by the Federal Housing Administration. FHA home loans require lower minimum credit scores and down payments than many conventional loans, which makes them especially popular with first-time homebuyers.

While the government insures these loans, they are actually underwritten and administered by third-party mortgage lenders approved by the FHA.

FHA loans come in 15-year and 30-year terms with fixed interest rates. The agency’s flexible underwriting standards are designed to help give borrowers who might not qualify for private mortgages a chance to become homeowners.

There’s one catch: Borrowers must pay FHA mortgage insurance, which is designed to protect the lender from a loss if the borrower defaults. Mortgage insurance is required on most loans when borrowers put down less than 20 percent. All FHA loans require the borrower to pay two mortgage insurance premiums:

If you were to borrow $150,000 with an FHA loan, for example, your upfront mortgage insurance premium would be $2,625 and your annual premium would range from $675 ($56.25 per month) to $1,575 ($131.25 per month), depending on the term.

FHA mortgage insurance premiums will be canceled after 11 years for most borrowers if they financed 90 percent or less of the property’s value — in other words, for those who put at least 10 percent down and stay current with their monthly mortgage payments. Loans with an initial LTV ratio greater than 90 percent will carry insurance until the mortgage is fully repaid.

FHA lenders are limited to charging no more than 3 percent to 5 percent of the loan amount in closing costs, and the FHA allows up to 6 percent of the borrower’s closing costs, such as fees for an appraisal, credit report or title search, to be covered by sellers, builders or lenders.

To be eligible for an FHA loan, borrowers must meet the following lending guidelines:

FHA borrowers get their home loans from FHA-approved lenders, which can set their own rates, costs and underwriting standards so long as the FHA minimums are met. Approved lenders range from the biggest banks and credit unions to community banks and independent mortgage firms.

Applying for an FHA loan requires a few key steps:

Unlike FHA loans, conventional loans are not insured by the government. Qualifying for a conventional mortgage requires a higher credit score, solid income and a down payment of at least 3 percent for certain loan programs. Here’s a side-by-side comparison of the two types of loans.

Each year, the FHA updates its loan limits based on home price movement. For 2023, the floor limit for single-family FHA loans in most of the country is $472,030, up from $420,680 in 2022. For high-cost areas, the ceiling is $1,089,300, up from $970,800 a year ago.

FHA is required by law to adjust its amounts based on the loan limits set by the Federal Housing Finance Agency, or FHFA, for conventional mortgages guaranteed or owned by Fannie Mae and Freddie Mac. Ceiling and floor limits vary according to the cost of living in a certain area, and can be different from one county to the next. Areas with a higher cost of living will have higher limits, and vice versa. Special exceptions are made for housing in Alaska, Hawaii, Guam and the Virgin Islands, where home construction is generally more expensive.

In addition to the standard 15-year and 30-year FHA loans for home purchases and refinancing, the FHA also insures other loan programs offered by private lenders. Here’s a look at each.

FHA 203(k) loans help homebuyers purchase a home — and renovate it — all with a single mortgage. Homeowners can also use the program to refinance their existing mortgage and add the cost of remodeling projects into the new loan. FHA 203(k) loans come in two types:

The Home Equity Conversion Mortgage (HECM) is the most popular type of reverse mortgage and is also insured by the FHA. A HECM allows older homeowners (aged 62 and up) with significant equity or those who own their homes outright to withdraw a portion of their home’s equity. The amount that will be available for withdrawal varies by borrower and depends on the age of the youngest borrower or eligible non-borrowing spouse, current interest rates and the lesser of the home’s appraised value or the HECM FHA mortgage limit or sales price.

The Energy Efficient Mortgage (EEM) program backed by the FHA allows homebuyers to purchase homes that are already energy-efficient, such as Energy Star-certified properties. The program can also be used to buy and remodel older homes with energy-efficient, or “green,” updates and roll the costs of the upgrades into the loan without a larger down payment.

The FHA Section 245(a) loan, also known as the Graduated Payment Mortgage, is geared at borrowers whose incomes will increase over time. You start out with smaller monthly payments that gradually go up. There are five specific plans available: three plans that allow five years of increasing payments at 2.5 percent, 5 percent and 7.5 percent annually; and two other plans with payment increases over 10 years at 2 percent and 3 percent annually.

Loan servicers can offer some flexibility on FHA loan requirements to those who have suffered a serious financial hardship or are struggling to make their payments. That relief might be in the form of a temporary period of forbearance or a loan modification that would lower the interest rate, extend the payback period or defer part of the loan balance at no interest.

An FHA loan might be the right choice for you if you have decent credit and don’t have a large down payment saved. If you have strong credit, however, there’s a good chance you’ll be able to qualify for a conventional mortgage even if you can’t put 20 percent down. With a conventional loan, too, you’ll be able to get out of PMI once you’ve built sufficient equity. Similarly, if you have a lot of money saved for a down payment, you might be able to get a conventional loan even if you have less-than-perfect credit.If you need a mortgage but don’t have enough for a 20 percent down payment (or sufficient credit), you might still be able to qualify. If your credit score is the issue, you can try finding a co-signer. If you’re applying with a partner or spouse who has good credit, it might make sense to have them apply for the loan alone so that your credit score doesn’t impact your approval chances.

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