8 Types of FHA Loans and How to Take Advantage of Them
FHA loans are ideal for borrowers that don’t meet the requirements for conventional home plans. The Federal Housing Administration program has a variety of home loan options that make it easier for people with lower credit scores and down payments to qualify for a mortgage loan. FHA loans are a flexible and cheaper option for first-time homebuyers, which helps more people purchase homes. This article will discuss the different types of FHA loans and how you can take advantage of them.
Benefits of FHA Loans
FHA loans offer benefits over traditional conventional home loans, including:
- Lower down payments: You only have to put 3.5% down instead of 20% in most cases. You can also choose to put more down to keep your monthly loan payments lower.
- Flexible income requirements: FHA loans might offer people with non-traditional employment models, like contract workers flexible loan options to purchase a home. For example, they might be a good option for freelancers and retired individuals.
- Lower credit requirements: FHA loans typically have a lower credit requirement than conventional loans, making it easier to buy a home if you have less than perfect credit.
- Competitive rates: While FHA loan interest rates are typically higher than conventional mortgage loan rates, they are still competitive and make purchasing a home affordable.
These benefits are aspects of FHA loans, but the exact rates will vary depending on your lender.
Types of FHA Loans
As we’ve already discussed, there are many types of FHA loans, many of which potential home buyers don’t even know about. They include:
1. Fixed-Rate FHA Loan
FHA loans are available in fixed-rate terms between 15 and 30 years. These loans come with a low down payment with competitive rates and lower credit qualifications than most conventional loans. However, the higher your credit score, the better your interest rate will be, so it’s always best to improve your credit score before applying for a home loan. The fixed-rate FHA loan is also considered the standard FHA loan and can help many first-time homebuyers purchase a house. However, you will have a higher monthly mortgage insurance premium for the life of the loan if you put less than 10% down.
2. Adjustable-Rate FHA Loan
An adjustable-rate FHA loan, also known as an adjustable-rate mortgage (ARM), has an interest rate that changes throughout the life of the loan. Typically, the rate starts low and increases over time. Many people choose the adjustable-rate loan because it has lower rates initially, which makes buying a house easier. Additionally, many people expect their incomes to increase over the life of the loan, making an increasing interest rate more manageable to pay off as time goes on. FHA ARMs have a few different term options, including:
- 1 & 3 Years: these ARMs can increase up to one point after the first or third year, with a lifetime increased percentage cap of 5%.
- 5 Years: A 5-year ARM can increase one point per year after five years with a cap of 5% or up to 2% per year after five years with a 6% cap.
- 7 & 10 Years: These ARMs can increase up to two points per year after 7 or 10 years with an increase cap of 6%.
FHA ARMs might be a good option for homebuyers who want to sell their homes before the rate increases or those that believe their incomes will increase over the life of the loan. Adjustable-rate mortgages are not as popular as standard fixed-rate mortgages, but they are still a good option, depending on the borrower and their needs. Unfortunately, mortgage rates adjust according to the real estate market, so your rate is unpredictable, which scares off many borrowers who want to ensure they know precisely how much they’ll owe each month.
3. Graduated Payment Mortgage
Also known as an FHA 245(a) loan, the graduated-payment mortgage has a fixed rate. These mortgages are structured, so your monthly payments increase at intervals. As your loan balance decreases, your equity will start to build and gain traction. All graduated payment mortgages have a 30-year term, but many people pay off the loan early.
These loans were created when rates were high, which made it difficult to reduce the principal balance. Now, homeowners can pay extra monthly to pay down their principal balance faster. Of course, you’ll need a long-term budget strategy with scheduled increased payments, but this is a great loan if you plan to stay in your home for at least 30 years.
4. FHA Energy Efficient Mortgage
The Energy Efficient Mortgage (EEM) loan offers financing that allows borrowers to roll the cost of energy-efficient upgrades into their loans. For example, homebuyers can use this program to upgrade their windows, HVAC, and insulation, but solar technologies also apply.
5. Mobile Home Loan
The FHA mobile home loan offers buyers the opportunity to finance a mobile home, viewed as personal property and typically has higher insurance rates. This type of loan can be used to purchase a home, lot, or both, and the maximum loan term ranges from 15 to 25 years.
6. Condo Loans
You can also purchase a condo using an FHA loan. Many condo associations have rules for property sales and home improvements, but there are restrictions regarding using your FHA loan for a condo, including:
- A community with a high percentage of owner-occupied condos
- Minimal non-residential square footage
- No rent-pooling
7. FHA 203(k)
The FHA 203(k) loan allows buyers to purchase fixer-uppers and finance home repairs and renovations with the same loan. This add-on allows financing for up to 100% of the post-renovation appraised home value, but this loan only helps those who need a mortgage for a fixer-upper.
8. Reverse Mortgages
Reverse Mortgages, also known as home equity conversion mortgages (HECM), allow qualified homeowners to receive cash disbursements by liquidating their built-up equity. This program is ideal for older homeowners who want to increase their monthly earnings. However, this loan reduces the home equity and has strict requirements.
Applying for an FHA Loan
If any of these types of loans look like a good fit for you, all you have to do is apply to see if you’re eligible. Of course, you should always shop multiple lenders to ensure you’re getting the best rates. Next, complete a loan application, giving the lender permission to check your credit scores and employment history. You’ll either be approved or denied, just like any other type of loan. Once you’re approved, you can begin shopping for a house with your approval in hand to show sellers you’re ready and able to purchase a home.
Matt Casadona has a Bachelor of Science in Business Administration, with a concentration in Marketing and a minor in Psychology. Matt is passionate about marketing and business strategy and enjoys San Diego life, traveling, and music.