What is an FHA Loan?

The United States Department of Housing and Urban Development, better known as HUD, is a government agency that oversees the Federal Housing Administration (FHA). Created in 1934, FHA does not make loans, but provides mortgage insurance made by approved lenders.

FHA has come a long way since its inception almost 80 years ago. It offers a variety of loan programs to meet the needs of low-to-moderate income and retired Americans. Because FHA insures the loan’s repayment should the borrower default on the mortgage, lenders are able to offer low closing costs, attractive interest rates and loans with smaller down payment requirements.

Let’s take a look at some of FHA’s most popular loan programs.

First-Time Homebuyer Program

With down payments as low as 3.5 percent and most of the closing costs rolled into the loan, FHA’s 203(b) program is ideal for the first-time buyer.

Two years ago FHA changed the program, establishing minimum FICO® score requirements:

  • FICO® score of 500 and below – ineligible for an FHA-insured mortgage.
  • FICO® score between 500 and 579 – eligible for the loan program but the down payment on the home must be 10 percent of the purchase price.
  • FICO® score of 580 and above – eligible for the maximum loan amount and a 3.5 percent down payment.

Remember, these are FHA’s requirements only; lending institutions have additional requirements. Because of this, it may be close to impossible to obtain a mortgage loan with a FICO® score under 580 and very difficult to obtain a loan with a score between 580 and 620.

FHA suggests that, because there are costs associated with applying for the loans, buyers with a low FICO® score may want to postpone applying for an FHA-backed loan until their FICO® scores increase to at least 620. Don’t forget that it is possible to repair your credit and raise your score.

If you feel you’re ready to apply for a first-time buyer FHA-guaranteed mortgage, you will find a database of FHA-approved lenders at their website.

Fixer Property Program

One of the more intriguing FHA-backed loans is the 203(k) program. Basically, this is a loan for the purchase of a fixer, or handyman special, that not only covers the purchase price of the home, but the repairs needed to make it habitable as well.

Available only to purchasers who will be living in the home, the loan carries a 3.5 percent down payment to qualified buyers.

Steps to obtain a 203(k) loan include:

  • Submit a purchase agreement on a property stating the purchase is contingent on 203(k) loan approval.
  • Choose an FHA-approved 203(k) lender (listed at FHA’s website).
  • Compile a proposal outlining the scope of work to be performed, including an itemized list detailing the estimated cost of each repair or improvement.
  • An FHA appraiser performs an appraisal to determine the property’s future value – the value after renovations are complete.
  • If the loan is approved, it closes and the construction begins.

The loan amount will include the purchase price, remodeling costs, “allowable” closing costs and a reserve fund of 10 to 20 percent of the total cost to repair the property. The reserve fund is used for unforeseen repairs that may come up during the construction process.

All funds are kept in an escrow account and disbursed according to a pre-determined schedule.

Manufactured Home Financing

HUD defines a manufactured home as a structure that is capable of being transported in one or two sections. In what they call “traveling mode,” the home must be a minimum of eight feet in width and 40 feet in length.

If you are considering the purchase of a manufactured home, FHA may be able to help you with the Title II program.

To qualify for the program, the home must be labeled as compliant with Federal Manufactured Construction and Safety Standards. Additionally, the home must:

  • be larger than 400 square feet
  • have been built after June 15, 1976
  • be classified as real estate but need not taxed as real estate
  • be built and remain of a permanent chassis
  • have a permanent foundation built to FHA standards
  • have a finished grade elevation beneath the home at or above those in Flood Zones A or V

The mortgage loan on the property must cover both the home and the site and be for no longer than 30 years.

While lending requirements are stricter than they were before the housing bubble, FHA-guaranteed loans still provide low-to-moderate income Americans a chance to purchase a home when they otherwise may not be able to.