As a real estate agent, you may work with clients with debt or bad credit. You’ll need to be able to clearly explain the mortgage options available to them so they can make important financial decisions for their family. Let’s investigate one option – a Federal Housing Administration (FHA) loan. We’ll answer the question, “What is an FHA loan?” and explain how FHA loans work. We’ll also tell you the requirements for obtaining a government-backed mortgage and the types of FHA loans.
What Is an FHA Loan?
An FHA loan is a government-backed mortgage with looser financial requirements than a traditional mortgage. They are typically for lower-income borrowers, those with poor or fair credit scores, or those with little money for a down payment.
Borrowers must still meet specific requirements to obtain an FHA loan. (More on these requirements later.) In addition, borrowers can only use FHA loans to buy a primary residence that they will occupy within 60 days of closing. In addition, an FHA-approved appraiser must complete the appraisal report, and the home must meet minimum property standards.
FHA Loan Requirements
Your client must meet the basic requirements to obtain an FHA loan. They must be U.S. citizens, legal permanent residents, or non-permanent residents with a valid Social Security Number.
It’s worth noting that your clients do not have to be first-time home buyers to qualify for an FHA loan. In addition, there are no income restrictions.
Here’s more information about qualifying for an FHA loan.
1. Credit scores and down payments
Borrowers with credit scores as low as 500 may be eligible for an FHA loan, but your clients with higher credit scores may qualify for better terms.
Typically, FHA loans require a minimum down payment of 3.5% of the purchase price. So, your client must have some cash to put toward the home.
2. Income and debt
Lenders will also analyze your client’s debt-to-income ratio, which compares their monthly payments to their gross monthly income. FHA guidelines typically require a maximum debt-to-income ratio of 43%, although exceptions may be made in some cases. Borrowers will be required to provide proof of income.
3. Mortgage insurance
If your client gets an FHA loan, they must purchase mortgage insurance, for which they’ll need to pay premiums. The mortgage insurance premium (MIP) is typically 1.75% of their loan amount. However, this premium can be rolled into the loan.
Your client must also pay an annual MIP, typically divided into 12 payments, and added to their monthly mortgage. The yearly premium varies depending on the loan amount, the mortgage’s term (or length), the size of their down payment, and their loan-to-value ratio. Annual MIP payments run approximately 0.15% – 0.75% of the base loan amount.
Learn more about FHA loan requirements by visiting the HUD website.
How Do FHA Loans Differ from Conventional Loans?
Your client may wonder about the difference between FHA loans and conventional loans. Here’s information to share with them.
Comparing FHA and Conventional Loans
| FHA Loans | Conventional Loans | |
| Minimum credit score/down payment | 500 with a 10% down payment or 580 with a 3.5% down payment | 620 and a 3% down payment |
| Mortgage Insurance | Required for all FHA loans | Only required when the borrower does not have a down payment of 20% |
| Type of home | Primary residence only | Primary residence, secondary residence, or investment properties |
| Interest Rate | Rates are comparable depending on qualifications | Rates are comparable depending on qualifications |
| Interest structure | Fixed or variable | Fixed or variable |
How Do You Apply for an FHA Loan?
Your client will apply for an FHA loan through an approved FHA lender. The lender will ensure your client meets the basic qualifications and will review their financial information, credit history, income, and employment.
If your client is approved, the lender will give them a loan limit. These limits vary by location.
Types of FHA Loans
There are several different FHA loan programs, but the primary program is the Basic Home Mortgage Loan 203(b), which could help your client buy a single-family or small multifamily home.
Here are some additional FHA loans available for clients who currently do not have an FHA loan.
- FHA 203(k) Rehabilitation Loan: This loan allows your clients to finance a home in addition to the cost of repairs or renovations.
- FHA Energy Efficient Mortgage: This program allows borrowers to finance the cost of energy-efficient improvements into their FHA loan. The goal of this program is to encourage energy-efficient upgrades in homes.
- FHA Adjustable-Rate Mortgage: This type of loan may have a lower initial interest rate than fixed-rate mortgages. However, the interest rate will change over time.
There are also FHA refinance and reverse mortgage options.
Pros and Cons of FHA Loans
As you discuss mortgage options with your clients, consider sharing the following pros and cons of FHA loans.
Pros of FHA Loans:
- A lower down payment is required when compared to a conventional loan
- More lenient credit requirements
- More flexible debt-to-income ratio requirements make it easier for borrowers with more debt to qualify for a home loan
- Come in either fixed or adjustable-rate options
- Options for home improvement financing
Cons of FHA Loans:
- The Mortgage Insurance Premium increases the overall cost of the loan
- Loan limits vary by location
- Property standards must be met
- More documentation requirements
As you can see, there’s a lot to learn when becoming a real estate agent. The good news is that your state-specific pre-licensing courses will teach you about FHA loans, real estate law, and everything else you need to know to pass your licensing exam AND be a great real estate agent.
Colibri Real Estate (formerly Real Estate Express) has educated more than 520,000 students over the last 25 years – and we can help you earn your real estate license, too.
Colibri Real Estate offers flexible learning options and the Pass or Don’t Pay Guarantee. Begin your journey to become a real estate agent today by learning more about the licensing qualifications in your state.
Sources:
“HUD 203(B) Mortgage Insurance.” HUD.gov / U.S. Department of Housing and Urban Development (HUD). Accessed November 20, 2023. https://www.hud.gov/program_offices/housing/sfh/ins/sfh203b.
“Loans | HUD.gov / U.S. Department of Housing and Urban Development (HUD).” Accessed November 20, 2023. www.hud.gov. https://www.hud.gov/buying/loans.
