Are you approved for an FHA loan? Or thinking an FHA mortgage could be the right direction for you? You very well may be correct, but let’s jump into the program, its history, how it works, and how it compares to conventional mortgages, so you can get a true breakdown.

In the beginning (which was 1934), the National Housing Act created what was called the Federal Housing Administration (FHA) to help assist the United States in getting housing back to strength during (and after) the Great Depression. During this time (in the Great Depression), foreclosures and mortgage defaults were rising sharply, and home ownership seemed a huge difficulty to obtain while much of the country was destitute.

The Federal Housing Administration (FHA), alongside other housing agencies developed around or after, created government insured mortgage programs that allowed middle to lower income Americans the ability to actually afford homes. With the government backing, lenders also felt comfortable lending to potential home buyers again because if the mortgage went into default, the lender was not 100% on the hook.

All-in-all, FHA’s mission became:

1. To help American’s realize the “American Dream”,
2. To stabilize American communities,
3. To help in promoting economic growth,
4. And to assist in reducing defaults.

FHA loans are often associated with “First-Time Homebuyer” programs, but you do not have to be a first-time homebuyer to access or use the program. FHA does often assist first-time buyers by having more lenient requirements in the areas of credit scores and credit history, down payment, and debt-to-income ratios. But, people across the country, not just first-time buyers, can benefit from this program. Depending on income and other requirements in your area, you may also be able to combine FHA with a down payment assistance program to help lower your barrier to entry in regards to the amount of money you have to bring into closing to purchase a home. Your mortgage loan officer will be able to tell you whether or not you can qualify for this down payment assistance aspect of your pre-approval to purchase (and if it would be a benefit to you, as many times it may not be).

Just like with everything, we can often see or hear quite a few myths about FHA loans, and it would make sense to go through some of those in the start to make sure you do not receive any incorrect information from people around you. After, we can jump into important FHA information and compare FHA loans to Conventional mortgage programs.

The most common myths we hear are:

1. FHA loans are “too complicated”, take “too long to close”, are “too much paperwork”, or are a pain because the “government gets involved”.
2. FHA loans are “confusing to the buyer”, or that “Conventional loans are always better”.
3. And finally, FHA loans “don’t benefit the seller”, “require a down payment”, or have “higher rates”.

We can go into quite a bit of detail on this myths, and why they are stated. But in order to not have this post turn into a book, let’s go through some quick answers.

FHA loans due require a down payment (just like conventional loans). The only programs that do not require a down payment are Rural Development Loans and VA loans (unless someone has run out of VA eligibility). But as we discussed, you may qualify for down payment assistance, depending on your income, the programs available, and more.

FHA loans are luckily not too complicated or confusing when it comes to you using one to buy a home. They can have extra complexities for the lender and loan officer you are working with in comparison to a conventional loan, but that should have zero impact on if the program is the best fit for you.

The government does get involved, just like with VA loans (Veterans Affairs Administration), Rural Development loans (United States Department of Agriculture), and even conventional loans (Fannie Mae and Freddie Mac are currently Government Sponsored Enterprises). You cannot escape that with any program. So, just accept the government is involved. Finally, being FHA compared to conventional does not elongate the closing dates

Despite the myth, FHA loans traditionally have lower interest rates when you compare credit scores and rates compared to conventional mortgages. It is not always the case, but often.

As far as conventional loans always being better, I have a simple answer for that. The loan program that is best for you, no matter what type it is, is always the best program. Do not get tripped up by any generalities when talking to people. Whenever you hear “always”, it should trigger a red flag in your mind. There are many scenarios when an FHA loan is a better program than a conventional loan, and vise versa. Take the one that puts you in the best spot.

Comparing FHA Loans to Conventional Mortgages:

Let’s do a quick comparison of the basic components of FHA mortgages vs Conventional Mortgages, to help you visualize similarities and differences.

1. Down Payments:
   • FHA – First-time home buyers and second time (plus) homebuyers can put down only 3.5% to qualify. Down payment assistance programs are available to cover down payment, if that person can qualify.
   • Conventional – First-time homebuyers can put 3% down with conventional programs called HomeReady, HomePossible, and HomeOne. Second-time homebuyers and after must put 5% down. Depending on qualifying, down payment assistance is available with conventional loans, just like FHA.
2. Credit Scores:
   • FHA – The FHA program can (with more strict qualifying criteria) go down to around a 580 credit score for qualifying a potential home buyer.
   • Conventional – Conventional programs will go down to a 620 credit score only, and most of the time will be far more picky on credit scores being higher to qualify at normal down payment ranges.
3. Debt-To-Income Ratios:
   • Debt-To-Income ratios describe how much debt, percentage wise, you can have of your income and still qualify for a mortgage. In essence, it helps determine the maximum amount you could qualify for.
   • FHA – Usually if someone has good credit and the file is strong, FHA could go up as high as 55% of someone’s monthly income for total debt payments, including the mortgage payment.
   • Conventional – with good credit and a strong file, conventional mortgages will allow someone to go up to 50% of their monthly income for total debt payments. Though this does not seem like a large difference, it can limit someone’s qualifying range by a decent amount, if the person needed to go up to their debt-to-income limits.
4. Mortgage Insurance:
   • Mortgage Insurance is extra insurance payments a person makes in their mortgage payment back to the government entity or a private company to lower the risk of the lender and insurer.
   • FHA – regardless of credit score, down payment, or other factors, FHA loans have to have mortgage insurance from anywhere from 11 years to the life of the loan (currently). The mortgage insurance costs are .55% of the loan amount per year if under 5% down, or .50% if 5% down or more. This can be good or bad. If you are not putting much money down and do not have the best credit scores, this is fairly inexpensive. If you have exceptional credit scores and are putting a decent amount down, this could be expensive compared to Conventional. You also have an up-front mortgage insurance premium of 1.75% of the loan amount that is rolled into your loan balance and paid over the life of the loan. This cost is worth considering in looking at total costs.
   • Conventional – Conventional mortgages can have no mortgage insurance required (called PMI – Private Mortgage Insurance) if you are putting down 20% or more when you purchase. Or they can have extremely high mortgage insurance if you are putting very little down and have credit scores in the lower 600s. And the mortgage insurance can be anywhere in between. They do not have any up-front mortgage insurance (required), so that is nice, and their mortgage insurance eventually goes away when you pay down your mortgage balance to below 78% of your original purchase price. But, conventional mortgage insurance can be wide ranging in the cost. It is not uncommon for someone to go FHA initially when they buy, if their credit is a little low, and then switch to conventional down the road once they have built better equity and improved their credit scores.
5. Manual Underwriting –
   • Manual underwriting allows loan officers and borrowers to try to tell the borrower’s story to offset perceived risk in the borrower’s file. The lender can dive deeper into the financial history of the borrower by getting rent history, utility bill history, or even skip criteria like if a borrower is missing a credit score. This allows some people to qualify even though they may not fit the standard guidelines that mortgage programs have in place.
   • FHA – FHA loans, along with VA loans and Rural Development loans allow for manual underwriting, with extra requirements. This can help more people qualify that otherwise would not have.
   • Conventional – Though it potentially can allow for manual underwriting, for the most part, lenders will not allow manual underwriting to be done on a conventional mortgage. If the automated underwriting system (AUS) that the file and risk is run through does not approve the borrower, the borrower is traditionally not qualified.
6. Maximum Loan Amounts –
   • FHA – as of January 2025, the maximum FHA loan limit for the average, non-high cost county in the US, was $524,225 (for a single family residence). This is not the maximum purchase price, but the most that FHA will borrower to someone in most areas of the country, after down payment. This amount will change each year.
   • Conventional – As of January 2025, the maximum conventional mortgage loan limit for average, non-high cost area, is $806,500. This, again, is not the purchase price, but the maximum amount that would be able to be lent after down payment. This amount will also change each year.
7. Occupancy –
   • FHA – In order to use an FHA loan, you have to purchase a property that you are going to live in as your primary residence. You cannot buy any properties with FHA that you will not have as your primary place of residence.
   • Conventional – Conventional loans allow someone to purchase a property that they are going to live in, use as a vacation home, or use as an investment property. If you are not going to live in the property as your primary residence, you do have to put more money down and often will see higher interest rates. But, you can buy those properties as long as you qualify.
8. Finally, property requirements –
   • FHA – When an appraisal is done on a property to prove the property’s value, and appraiser will also notate any repair items that are needed to be fixed in order to meet government guidelines. FHA loans will have more strict criteria (traditionally). You can often see detailed requirements such as scraping chipping paint, replacing gutter down spouts, and smaller items required in order to close on a home. This can make it more difficult to get an FHA loan offer accepted by a seller, if they worry about needing to do small repairs.
   • Conventional – Conventional loans, for the most part, will have lesser criteria around portions of the home that need repair. This is both good and bad. It can definitely allow someone with a conventional mortgage to close on a older home with less difficulty, a benefit which also improves a conventional buyer’s standing in the eyes of the seller. But, the FHA buyer could get the seller to do a little more work on the property (if the seller accepts the FHA offer in the first place) in order to close on the home. This is not a reason to choose FHA over conventional, but could be looked on positively by some buyers, in certain situations.

All-in-all, FHA loans are extremely good programs that have their own benefits that other programs do not have. Does that mean they will be the best program for everyone? Of course not. No program will be a one-size-fits-all option. Figure out what program puts you in the best spot both for your home offer and your finances and go from there. If FHA is the best, you won’t be disappointed there.

Walk on over to the next post with your best bud. I’ll see you there (not literally).