An FHA loan is a mortgage product insured or backed by the Federal Housing Administration (FHA). The guidelines and requirements for FHA loans are set forth by the Department of Housing and Urban Development (HUD).

FHA loans are available for purchase, refinance, streamline refinance, property improvement, and even reverse mortgages. 

FHA vs. Conventional

FHA loans, which are backed by the Federal Housing Administration, feature a low minimum down payment of 3.5%, more flexible credit qualifying criteria, and may require two types of mortgage insurance premiums.

Conventional loans have more stringent qualifying criteria than FHA loans, especially when it comes to your credit. In addition to higher minimum FICO score requirements, conventional loans typically require a longer look back into your credit history for derogatory events, like a bankruptcy, short sale, or foreclosure. 

With conventional loans there are additional options to reduce, avoid, and remove private mortgage insurance premiums that are unavailable on FHA loans. Learn more about Conventional Loans here.

FHA vs. VA

While FHA loans are available to anyone who meets the qualifying criteria, VA Loans are reserved for active duty military personnel, veterans, and their surviving spouses. 

FHA loans require a minimum down payment of 3.5% and carry both an up-front fee and monthly Mortgage Insurance Premium (MIP). VA loans can only be used to purchase a new primary home or refinance a current primary home and allow for 100% financing — meaning no down payment or existing home equity is required and there are no Mortgage Insurance Premiums to pay.

VA Loans, which are backed by the Department of Veterans Affairs, typically require a Funding Fee of between 1.4% and 3.6% with exceptions for those receiving VA disability benefits, surviving spouses, and active-duty Purple Heart recipients. Learn more about VA Loans here.

FHA vs. USDA

FHA loans are available on any FHA approved property across the country. USDA Rural Development loans are specifically for use in qualifying rural areas and have household income limits based on the area. 

USDA loans allow for up to 100% financing without requiring Private Mortgage Insurance (PMI) but do require a 1% guarantee fee which can be paid upfront or set up on a monthly basis.

Qualifying for an FHA loan may be simpler than qualifying for a similar conventional loan product, based on your income, assets, and credit. If you are planning on a 3.5% down payment, ideally your debt-to-income ratio should be less than 50%, and your credit scores should be greater than 580.

FHA loans have a few specific guidelines over and above other types of loans. 

• FHA loans can only be used to purchase a primary home (or a multi-unit property as long as you plan to occupy one of the units).
• FHA loans require an appraisal and inspection report from an FHA approved appraiser, certifying the value as well as the safety and habitability of your home.
• Condominium projects must be approved by the FHA to be eligible for FHA loans.
• Cash-out FHA loans typically require that you occupy the property for 12 months prior to refinancing. 

Most FHA loans require two types of mortgage insurance; an up-front fee of 1.75% of the loan amount and a monthly Mortgage Insurance Premium (MIP) that is calculated based on your loan amount, loan term, and loan-to-value ratio.

The up-front fee may be reduced on certain FHA Streamline refinance products, depending on the funding date of your current FHA loan.

In most cases, you will need to refinance into a different type of loan to drop this fee from your payments. Ask a JFQ mortgage professional about removing your MIP and we will show you the steps to take. Learn more about mortgage insurance here.