FHA (Federal Housing Administration)

Definition

The Federal Housing Administration (FHA) is a government agency created in 1934 as part of the National Housing Act. It provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories. The goal of the FHA is to increase homeownership opportunities for low-to-moderate-income individuals by reducing the risk for lenders and providing affordable terms and down payments.

Examples

First-Time Homebuyer: A person buying their first home can get an FHA-insured loan, which might require a lower down payment than a conventional loan. For example, instead of a 20% down payment, the FHA requirement could be as low as 3.5%.
Refinancing: An existing homeowner can refinance their mortgage through an FHA loan to take advantage of lower interest rates or to switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage.
Mortgage Insurance: If a buyer fails to make a 20% down payment, an FHA loan allows them to purchase a house by requiring ongoing mortgage insurance premiums to mitigate the lower initial equity investment.

Frequently Asked Questions

What are FHA loan requirements?

Borrowers typically need a credit score of at least 580 to qualify for FHA’s 3.5% down payment program. However, those with a score of 500-579 may still be eligible with a 10% down payment. Additional requirements include sustained employment history, proof of income, and a reasonable debt-to-income ratio.

How does FHA mortgage insurance work?

FHA loans require two types of mortgage insurance premiums: an upfront mortgage insurance premium (UFMIP) and an annual mortgage insurance premium (MIP). UFMIP is 1.75% of the loan amount and can be rolled into the loan, while MIP varies depending on the loan length, amount, and initial loan-to-value ratio.

Can FHA loans be used for any property?

No, FHA loans have property standards and may require a home appraisal by an FHA-approved appraiser to ensure the property meets HUD’s minimum standard for health and safety.

How long do you have to pay FHA mortgage insurance?

It depends on the terms of the loan. For borrowers making a down payment of less than 10%, MIP typically remains for the life of the loan. For those with a higher down payment, MIP may be canceled after 11 years.

Conventional Loan: A mortgage that is not insured or guaranteed by any agency of the federal government, as opposed to FHA loans.
VA Loan: Mortgage loans guaranteed by the U.S. Department of Veterans Affairs, available to veterans, active-duty service members, and certain members of the National Guard and Reserves.
Down Payment: An initial, upfront portion of the total amount due, usually given in cash at the beginning of the loan.

Online Resources

References

U.S. Department of Housing and Urban Development (HUD). “FHA Resource Center.” HUD.gov.
Federal Reserve. “Consumer’s Guide to Mortgage Refinancing.” FederalReserve.gov.
Investopedia. “Federal Housing Administration (FHA).” Investopedia.com.

Suggested Books for Further Studies

Home Buying Kit For Dummies by Eric Tyson and Ray Brown.
The Book on Rental Property Investing by Brandon Turner.
Mortgage Management for Dummies by Eric Tyson and Robert S. Griswold.

Real Estate Basics: FHA Fundamentals Quiz

### Can a borrower with a credit score of 580 qualify for an FHA loan with a 3.5% down payment? - [x] Yes, they can qualify with a 3.5% down payment. - [ ] No, they will need at least a 10% down payment. - [ ] Yes, but only if they have an additional guarantor. - [ ] No, they do not qualify for any FHA loan. > **Explanation:** Borrowers with a credit score of 580 or higher can qualify for an FHA loan with as little as a 3.5% down payment. ### Which fee is NOT associated with FHA mortgage insurance? - [ ] Upfront Mortgage Insurance Premium (UFMIP) - [ ] Annual Mortgage Insurance Premium (MIP) - [x] Private Mortgage Insurance (PMI) - [ ] Late Fee Insurance (LFI) > **Explanation:** FHA loans require an Upfront Mortgage Insurance Premium (UFMIP) and an annual Mortgage Insurance Premium (MIP). Private Mortgage Insurance (PMI) is typically used with conventional loans, not FHA loans. ### What is one advantage of an FHA loan over a conventional loan? - [x] Lower down payment requirements - [ ] No need for a property appraisal - [ ] No need for proof of income - [ ] Exemption from paying property taxes > **Explanation:** FHA loans typically have lower down payment requirements compared to conventional loans, making homeownership more accessible to first-time buyers and those with lower credit scores. ### How long might you need to pay MIP if you made a less than 10% down payment on an FHA loan? - [ ] 5 years - [ ] 7 years - [ ] 11 years - [x] For the life of the loan > **Explanation:** Borrowers who make a down payment of less than 10% on an FHA loan typically pay Mortgage Insurance Premiums (MIP) for the life of the loan. ### Can FHA loans be used for investment properties? - [ ] Yes - [x] No - [ ] Yes, but only multi-family units - [ ] Yes, if approved by the lender > **Explanation:** FHA loans are intended for primary residences and cannot be used for investment properties. ### What must a property undergo for it to qualify for an FHA loan? - [ ] A local government inspection - [ ] An environmental review - [ ] A community board approval - [x] A home appraisal by an FHA-approved appraiser > **Explanation:** Properties must undergo an appraisal by an FHA-approved appraiser to ensure they meet HUD's minimum standards for health and safety. ### When was the Federal Housing Administration (FHA) established? - [ ] 1929 - [ ] 1945 - [ ] 1957 - [x] 1934 > **Explanation:** The Federal Housing Administration (FHA) was established in 1934 as part of the National Housing Act to improve housing standards and conditions and to provide an adequate home financing system through mortgage insurance. ### How does the FHA help make homeownership more accessible? - [x] By providing mortgage insurance which reduces lender risk - [ ] By paying part of the mortgage for the borrower - [ ] By offering zero interest loans - [ ] By allowing any credit score for qualification > **Explanation:** The FHA helps make homeownership more accessible by providing mortgage insurance to reduce the risk for lenders, making it easier for them to offer loans to borrowers with lower down payments and credit scores. ### Is the FHA a lender that directly offers mortgages to borrowers? - [ ] Yes - [x] No - [ ] Yes, but only in certain states - [ ] Yes, if guaranteed by a co-signer > **Explanation:** The FHA is not a lender and does not directly offer mortgages. Instead, it insures loans made by FHA-approved lenders against borrower default. ### What kind of insurance is specific to FHA loans that reduces lender risk? - [ ] Title insurance - [x] Mortgage insurance - [ ] Auto insurance - [ ] Fire insurance > **Explanation:** FHA loans require mortgage insurance, which helps to reduce lender risk and makes it possible for borrowers to qualify for loans with lower down payments and credit scores.