The Loan Designer | Your Guide to FHA Mortgages

What is an FHA Loan?

An FHA loan is a mortgage that’s insured by the Federal Housing Administration (FHA), a U.S. government agency within the Department of Housing and Urban Development. The government agrees to insure loans for lenders that have been FHA approved to reduce risk to the lender.

Types

While the FHA insures many types of loans, the FHA 203(b) and FHA 203(k) tend to be the most popular.

FHA 203(b) Mortgages: The FHA 203(b) is widely known as the basic FHA loan and is the most common loan that the FHA insures. This type of loan has more relaxed qualification guidelines than conventional loans because the government helps to manage the lender’s risk. As with many conventional mortgages, FHA 203(b) mortgage funds are typically disbursed in a single amount. These types of loans can be some of the most affordable, requiring down payments as low as 3.5%.
FHA 203(k) Mortgages: The FHA 203(k) loan is often known as a rehabilitation mortgage, because they’re intended for homes that require either minor remodels or significant structural repairs. They’re similar to the 203(b), with funds included for home improvements, renovations, and repairs. This type of loan is disbursed in stages, usually separated by the amount needed for the purchase of the home and individual repairs as they are certified and completed. The size of 203(k) loans varies depending upon the work that needs to be done and the type of loan given, however the maximum amount permitted for this type of loan is the home’s value plus $35,000.
FHA Streamline 203(k) Mortgage: The Streamline 203(k) loan is a simplified process that eliminates much of the paperwork required for a normal rehabilitation mortgage. This type of loan is intended for purely cosmetic remodeling, such as kitchen, bathroom, patio, deck, or siding; therefore, the available funding is less than that of a normal 203(k) loan. The amount permitted for a Streamlined 203(k) is limited to one of two options: the purchase price of the home plus renovation expenses or 110% of the home’s value. The loan will be limited to the lesser of the two totals.

How Can an FHA Loan Help You?

Lenders take on considerably less risk with an FHA loan because the U.S. Department of Housing and Urban Development agrees to cover any loss they may incur if there are problems with the payment of the mortgage. This allows lenders to offer loans with lower interest, more flexible terms, and less stringent guidelines. These benefits will make it easier for you and your family to build home equity and refinance your mortgage in the future if you choose to do so.

It’s also typically easier to qualify for an FHA loan than it would be to qualify for a conventional loan. To qualify for an FHA loan, a less-than-perfect credit score is usually acceptable. Another advantage of choosing an FHA loan is that this type of loan is usually assumable. This means that if you choose to sell your home, the new homebuyer can assume your remaining FHA insured loan balance.

All loans are subject to underwriting or investor approval. Other restrictions may apply. This is not an offer of credit or a commitment to lend. Guidelines subject to change.