Homebuying is an expensive endeavor, but still very much a part of the American dream. To make it more accessible, the Federal Housing Administration (FHA)—part of the U.S. Department of Housing and Urban Development—insures certain types of loans.
FHA loans aren't given out by the government; instead, borrowers apply for FHA loans at participating lenders, such as banks. The lenders fund the loan, which is insured by the government to reduce risk and allow lenders to offer better terms to eligible borrowers.
FHA loans are popular for first-time buyers due to low down payment requirements, less stringent borrowing criteria and potentially better interest rates than conventional loans. On the flip side, they can have significant limits, restrictions and fees.
While the phrase "FHA loan" is often used to describe a single type of mortgage, the FHA actually offers a variety of loan products and programs. This includes everything from loans that bundle rehabilitation or energy-improving expenses into a mortgage to loans for specific populations such as Native Americans and Native Hawaiians. Here are five of the most common FHA loans available, though this list is not exhaustive.
1. Basic Home Mortgage 203(b)
What is it? This type of loan is the most popular and traditional mortgage the FHA offers. The rest of the loans mentioned in this article are still FHA loans, but this type of loan is usually what people mean when they say "FHA loan." It's ideal for first-time homebuyers because its down payment requirements are as low as 3.5%, and its interest rates and credit criteria may be lower than with conventional mortgages.
Key requirements: These loans are for a principal residence only, though they can be used for one- to four-unit structures. The amount you can borrow with a 203(b) mortgage depends on your location; you can look up FHA mortgage limits in your area. The home must pass strict HUD appraisal standards, and homeowners must pay mandatory mortgage insurance unless they can provide a down payment of 10% or more.
2. FHA's Energy Efficient Mortgage
What is it? This mortgage helps homebuyers (or those wanting to refinance) make their home more energy-efficient, which lowers utility bills. The FHA's Energy Efficient Mortgage program gives borrowers more than what's needed to purchase a home, with the remaining amount used for updates. The homebuyer only has to qualify for enough to buy the home—not the additional "energy package." Eligible expenses include energy-saving equipment and wind or solar energy technologies.
Key requirements: There are limits to how much extra you can borrow for the energy-efficient improvements, which are dependent on several factors specific to your situation. You must have a qualified home energy rater or assessor identify what measures should be added, and any improvements must be considered cost-effective.
3. FHA 203(k) Rehab Mortgage
What is it? While you can find a more affordable property by purchasing a home in need of repairs, the cost of renovation can be significant. The FHA's 203(k) Rehab Mortgage helps homebuyers purchase and repair or modernize a home with a single mortgage. It can also be used to rehabilitate a home someone already lives in.
Key requirements: To qualify for an FHA loan for rehab, the home must be at least one year old. The rehabilitation cost must be at least $5,000, though the property's total value—rehabilitation included—must still fall within FHA's mortgage limits for the location. Covered improvements range from smaller modernizations to complete reconstruction. The property must meet certain structural and energy efficiency standards, though the list of eligible activities covered is extensive.
4. Mortgage Insurance for Disaster Victims Section 203(h)
What is it? Americans who lost their homes in a major disaster can qualify for a special FHA loan with no down payment. This 203(h) program is intended to provide low-cost mortgages to help disaster victims recover and either rebuild or buy another home. Unlike other FHA loans, no down payment is needed (though there are still the typical closing costs).
Key requirements: You must have lived in a presidentially designated disaster area, and your home must have been either destroyed or damaged enough that replacement or reconstruction is needed. The mortgage can be used to reconstruct or buy a single-family home, and it must be your principal residence. Those interested in qualifying for a Section 203(h) mortgage must submit their application to a lender within one year of the president declaring the disaster.
5. Good Neighbor Next Door
What is it? This program allows certain professionals to purchase homes in designated revitalization areas at a steep discount. Eligible workers include teachers, firefighters, law enforcement officers and emergency medical technicians. A limited number of properties are sold through the Good Neighbor Next Door program to eligible borrowers at 50% off the listing price. Additionally, these borrowers can apply for an FHA-insured mortgage and only pay a $100 down payment. If more than one person wants a property, someone is selected via random lottery.
Key requirements: You must be a full-time employee in a specified profession and plan to remain employed for at least a year. You and your spouse cannot have owned a home for a year prior, though you don't have to be first-time homebuyers.
With a Good Neighbor Next Door loan, you commit to living in the home for three years as your sole residence, re-certifying this annually (unless you're active-duty military). HUD requires participants to sign a second mortgage and note for the discount amount, but this "silent mortgage" has no interest or payments, and it goes away if the three-year occupancy requirement is met.
Boost Your Credit First
Even though FHA lending requirements can be more lenient than those for conventional loans, your credit is still checked and must meet the lender's requirements. Check your credit for free with Experian, and if it needs help, take steps to improve your credit before applying for an FHA loan so you're more likely to qualify, or to qualify for a lower interest rate.