Federal Housing Administration loans are designed to help Americans who are struggling to afford a home. These government-backed mortgages have more lenient requirements for borrowers, like lower credit score and down payment thresholds for approval, which could make a big difference.
FHA loans made up about 15% of the purchase mortgage market in September, according to the Mortgage Bankers Association, as more Americans seek affordable mortgages amid higher home prices and borrowing costs. FHA loans, which often help low- to moderate-income buyers and first-time buyers, have insured tens of millions of properties since 1934.
“FHA loans are a big part of my toolbox when working with buyers, especially first-timers or those who might not have a hefty down payment saved up,” says real estate pro Clint Jordan, founder of the Mil-Estate Network and The Jordan Group in Colorado Springs, Colo. “These loans can make homeownership accessible for more people given their lower down payment requirements and more lenient credit criteria.”
Nicholas Barta, division president and loan originator for Security First Financial in Englewood, Colo., has noticed an uptick in FHA loans. Barta processes some of the highest volume of FHA loan originations in the country.
“I believe [the increase] is due to the higher interest rates and the lack of savings,” Barta says, adding that FHA loans provide for down payment requirements as low as 3.5% down payment and more flexibility when it comes to credit and debt-to-income ratios. “We are also seeing more people utilize down payment assistance than ever before. Many buyers just don’t have the savings to do traditional down payments in this economy.”
Barta hopes more real estate professionals learn how FHA loans work and understand FHA loan requirements so potential home buyers can benefit from their agent’s knowledge. “There are a lot of misconceptions about FHA loans and how hard they are to complete,” says Barta. “Real estate professionals should find a good lender in their area who is well-versed in FHA and get educated.”
Knowing how to work with FHA buyers also can give you a competitive advantage when courting new clients Learn more about FHA home loans, including which home buyers may benefit the most from them and how these loans can impact real estate negotiations and home purchase agreements.
Debunking 6 FHA Loan Myths
Understanding FHA Loan Requirements
FHA government-backed loans are different from conventional mortgages, which are issued by private lenders and more commonly used by consumers. But conventional mortgages typically have stricter eligibility requirements. One of the main draws to FHA loans is its more lenient requirements for buyers who have less money saved up for their home purchase. FHA borrowers may be eligible for a 3.5% down payment if they have a credit score of 580 or higher; borrowers with a credit score between 500 and 579 may need a 10% down payment.
What Are FHA Loan Limits?
This is the maximum loan amount that FHA lenders will approve for a home purchase. FHA loan limits can vary geographically and are updated annually to reflect any changes in the real estate marketplace. In 2024, the FHA loan limit for most parts of the country was $498,257 for a single-family home. Find the latest FHA loan limits in your area at HUD.gov.
One main difference with FHA loans compared to other financing is that FHA requires the property to meet minimum standards set by the Department of Housing and Urban Development. These standards help ensure buyers avoid purchasing a home with safety hazards and reduces lenders’ risks.
HUD requires that each property insured with an FHA mortgage be evaluated by an appraiser for safety, security and structural soundness. The appraiser will check whether the electrical system complies with building codes; the water supply is sanitary; utilities are in good condition (sewer, gas, etc.); proper ventilation exists in the attic and basement; and pests are present. FHA also has requirements for the home’s exterior, including direct street access, proper water drainage and a structurally sound roof. HUD offers a detailed list of its minimum property requirements at HUD.gov.
The lender will then determine from the appraiser’s report whether repairs need to be addressed prior to finalizing the loan.
FHA Loan Requirements and Repair Negotiations
If the appraiser identifies issues that don’t meet FHA’s “minimum property standards,” the buyer’s agent likely will need to negotiate repair credits or fixes on the buyer’s behalf. FHA generally requires repairs to be made prior to closing; in some cases, funds can be placed in an escrow account if repairs are delayed. If a seller does not agree to repairs, the lender will not approve the FHA loan.
“Most of the time, the repairs are minor, and the seller will do the repairs without any additional credits,” Barta says. “Chipping paint is probably the one we see the most. There are those times when everyone is aware that a major repair needs to be completed. If the roof needs to be replaced or a sewer line repaired, those are things that should be negotiated and addressed in the sales contract.”
But that doesn’t have to be a dealbreaker: Regardless of whether the purchase is being financed by FHA, major issues still often need to be addressed in a home sale, Jordan adds. “Communication with the listing agent, ensuring the buyer’s financials are solid and, perhaps, being flexible with closing timelines [can help FHA] offers stand just as strong as those backed by conventional loans,” he says.
Avoiding FHA Red Flags
FHA delinquencies are rising, up 131 basis points at the end of the fourth quarter of 2023, according to the Mortgage Bankers Association’s National Delinquency Survey. Economists blame a rise in property taxes and insurance, credit card debt delinquency and lower personal savings as reasons for the higher defaults.
Real estate purchase agreements can help home buyers avoid potential FHA loan pitfalls. “Maintain open lines of communication with your buyers about what the process entails and set realistic expectations,” Jordan recommends. “Also, work closely with lenders who are experienced in handling FHA loans—they can be instrumental in the process.”
Avoiding FHA Loan Pitfalls
Not factoring in all the fees: FHA home buyers are required to pay a mortgage insurance premium (MIP), regardless of their down payment amount. An upfront fee is typically 1.75% of the purchase price, which can be financed into the mortgage. Borrowers also will have to pay an annual fee, ranging from 0.15% to 0.75% of the loan, according to averages from NerdWallet, a personal finance resource.
Sales prices and appraisal mismatch: The FHA amendatory clause, an addendum in a purchase contract, can help protect borrowers in situations where an appraisal is lower than the agreed-upon sales price. This clause allows a borrower to cancel a home purchase and receive a refund of their earnest money if the home appraises below the sale price. Buyers who wish to proceed anyway can work with their agent to renegotiate the sales price with the seller or even pay the difference in cash.
Properties that don’t meet FHA standards: Real estate agents should become aware of FHA’s minimum property standards to help their buyers find homes that are likely to qualify, Jordan recommends. Beware of “fixer-uppers,” which may be less likely to get approval. (However, in those situations, the FHA 203(k) loan could help borrowers wrap the purchase and renovation costs into one mortgage.)
Location issues: The location of the property may be a factor in FHA approval. Lenders may require home buyers to obtain additional insurance, like flood insurance, when approving properties in a designated flood zone. Also, appraisers may flag noise or other hazards—even low-flying aircrafts for homes near an airport—that could hamper the property’s future marketability.
Changing your credit profile: Just like with other loans, home buyers could jeopardize their FHA financing prior to closing. During the loan’s underwriting, borrowers should avoid making changes to employment or how they’re paid; making major purchases, particularly on credit cards; opening new debt; and missing or making late payments, Barta says.
Property use: FHA loans can only be used for purchasing a primary residence. They cannot be used to purchase a rental property or second home.
Forgoing a home inspection: FHA appraisals should not be mistaken as a home inspection. Home inspections are not required for an FHA-insured mortgage but can offer a thorough evaluation of the property’s condition beyond the FHA appraisal.
Missing home warranty addendums: HUD requires, in certain cases, that FHA loans include a 10-year warranty that covers the construction and structural integrity of the home. FHA loan borrowers purchasing properties that are “proposed,” under construction or less than a year old are required to obtain a HUD-accepted, insured 10-year protection plan.
Dismissive home sellers: “Many agents and sellers worry that the appraisal will call out a repair or deficiency that will cause a hurdle that cash or conventional financing will not,” says Nick Buche, a real estate pro with RE/MAX Professionals in Maplewood, Minn. Some sellers may not want to accept an offer from an FHA buyer because of those concerns. Buyer’s agents can make offers more competitive by including the buyer’s mortgage preapproval letter, having the buyer make a larger earnest money deposit or down payment and working with FHA lenders who can help allay the buyer’s fears about the process.
Conventional vs. FHA Loans
Conventional loans
- Higher credit score requirements (usually 620 or higher)
- Higher down payment requirements to avoid paying mortgage insurance (some low down payment options available)
- More lenient property standards
- Private mortgage insurance required for down payments below 20%
- Debt-to-income ratio requirement is often 36% or less, possibly more
- Purchases can be for a primary residence, vacation home or investment property
FHA Loans
- Lower credit score requirements (as low as 500)
- Lower down payments (as low as 3.5%)
- Property must meet minimum standards and have an FHA appraisal
- Mortgage insurance premium (MIP) payment is required, regardless of down payment amount
- Must be used for a primary residence
Source: NerdWallet
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