What Is an FHA Mortgage Loan?
FHA mortgage loans are home loans insured by the U.S. Government's Federal Housing Administration (FHA). An FHA mortgage is an important option to consider when looking for the home of your dreams, especially for first-time homebuyers or buyers with low to moderate incomes.
FHA Loan Highlights
The Federal Housing Administration (FHA) was formed in 1934 to spur greater homeownership numbers in the U.S. and to facilitate home financing, improve housing standards and increase employment in the home-construction industry. FHA mortgage loans accomplish this through:
- Low down payment requirements
- Flexible income and credit requirements
- Fixed- and adjustable-rate loan options
- Offering loans for 1- to 4-unit properties and condos in some cases
- Allowing gift funds from a relative or employer*to be used for a down payment
- Allowing home sellers to contribute up to 6% of the applicant's closing costs *Subject to underwriting review and approval.
FHA property requirements
The Federal Housing Administration (FHA) has established certain property requirements for homes that are eligible for FHA financing. These requirements help ensure that the home is safe, secure, and meets the standards of the FHA. The main requirements for FHA-approved properties are as follows:
- The property must be a single-family home or a condo that meets the FHA’s approval guidelines.
- The property must be in good repair, with no major defects or hazards.
- The property must have a functioning heating and cooling system.
- The property must have a safe and secure structure, with no evidence of pests or vermin.
- The property must have functioning plumbing and electrical systems.
- The property must meet the FHA’s minimum property standards, which are detailed in the FHA’s Single Family Housing Policy Handbook.
Buying a condo with an FHA loan can be tricky because it must be on the FHA's approved condo list. After the housing crisis in the 2000s, most condo complexes were removed from the list and had to get re-approved. Many didn't due to the demanding process. So, it's pretty likely that you won't find your condo community of choice on FHA's approved list. That being said, you can search for approved condo properties on HUD's website. FHA lenders cannot approve a loan if the property doesn't appraise for the offer price or if there are major structural or quality-of-life problems.
FHA loan limits for 2023
The FHA publishes loan limits annually based on median housing prices throughout the country. The limitations include a floor – the maximum allowed loan in low-cost areas – and a ceiling. The ceiling applies in states and counties with high-cost areas for homebuyers. Additionally, even higher limits are available in Alaska and Hawaii.
Maximum loan amounts vary significantly between the floor and ceiling, depending on where you buy. There are even dramatic differences state by state.
Massachusetts FHA loan limits by county
|County name||One unit||Two unit||Three unit||Four unit||Median sale price|
How to qualify for an FHA loan in Massachusetts
Qualifying for an FHA loan in Massachusetts is generally more flexible than qualifying for a conventional loan. You need less money for a down payment with an FHA loan, and you may qualify even if you have a lower credit score or have had a bankruptcy or foreclosure in your past. While first-time buyers often choose FHA loans, they are available for repeat buyers, too. You'll still need to meet the basic requirements for an FHA loan, including:
- Minimum 500 credit score. If you have a credit score between 500 and 579, you may be eligible for an FHA loan but you'll need to make a 10% down payment.
- Minimum down payment of 3.5%. If your credit score is 580 or higher, you may qualify for a down payment of 3.5% on a home with an FHA loan.
- Debt-to-income (DTI) ratio of 43% or less. Lenders look at your debt-to-income ratio, which divides your monthly income by monthly debt payments, to measure your ability to take on a mortgage loan. To qualify, aim for a DTI of 43%, but higher debt-to-income ratios may be acceptable if you have a high credit score or extra cash reserves.
- Mortgage insurance. Two types of FHA mortgage insurance are required for FHA borrowers. First, you'll pay an upfront mortgage insurance premium (UFMIP), which is 1.75% of your total loan amount and due at closing. Then, you'll pay monthly insurance premiums (MIP) from 0.45% to 1.05% of your loan amount divided by 12.
- FHA appraisal. The home you purchase with an FHA loan must go through an FHA appraisal to verify its value and condition. FHA appraisals tend to be stricter than conventional home appraisals.
- Occupancy. The home you purchase with an FHA loan must be your primary residence for at least 12 months.
What is an FHA203(k) loan?
An FHA 203(k) loan is a type of FHA loan that is specifically for bundling the costs of necessary renovations or home improvements into the mortgage loan at the time of purchase or refinancing. It is a great option for people who have found a home that needs a little love before it is 100% move-in ready. Or, some borrowers choose to take out an FHA203(k) refinance loan later, when certain updates to the home become necessary. At Fairway we offer FHA Limited 203(k) loans, which can provide up to $35,000 (including a contingency reserve) to help make non-structural home improvements or renovations, such as updating a kitchen or bathroom, replacing flooring, purchasing new appliances or repairing the roof. We also offer an FHA Standard 203(k) for homes that may need more than $35,000 in renovations, or for homes where the necessary renovations may be more structural in nature.
Adjustable-rate loans, Fixed-rate loans and Streamline Refinance
- Adjustable-rate mortgage loans are available through an FHA mortgage loan. An adjustable-rate mortgage loan, or ARM, is a home loan that starts with a lower fixed interest "teaser" rate for a period of five to 10 years, followed by periodic rate adjustments based on current market mortgage rates. Adjustable-rate mortgage loans may be the right mortgage loan option for borrowers interested in a lower introductory interest rate and greater flexibility if the borrower thinks they may only stay in the home they are buying for a few years, instead of for the entire life of the mortgage loan.
- Fixed-rate mortgage loans are also available through an FHA mortgage. The stability and predictability of a fixed-rate mortgage loan are the biggest advantages associated with these mortgage loans. You will know exactly how much interest you will pay over the life of the mortgage loan even before you sign all your documents. The total monthly payment of principal and interest remains fixed over the life of the loan, and in the early years in the life of your mortgage loan, most of your payments will go toward that interest. As you pay off more and more of your fixed-rate mortgage loan over the years, the amount paid monthly toward loan principal will increase, and the amount paid monthly toward interest will decrease.
- Streamline refinance refers to the refinance of an existing FHA mortgage, requiring limited borrower credit documentation and underwriting, because all that has previously been initially taken care of during the original FHA home purchase transaction. Basic requirements of a streamline refinance include (1) the mortgage to be refinanced must already be FHA insured and must be current, (2) cash in excess of $500 cannot be taken out as a result of the streamline refinance transaction and (3) the refinance must result in a net tangible benefit to the borrower.