What is an FHA Loan?
FHA loans are mortgages insured by the Federal Housing Administration, a government agency within the U.S. Department of Housing and Urban Development (HUD). These loans are designed to help low-to-moderate income borrowers, first-time homebuyers, and those with less-than-perfect credit qualify for homeownership.
FHA doesn't lend money directly – instead, they insure loans made by FHA-approved lenders like Loan Factory Inc. This insurance protects lenders against losses if borrowers default, allowing lenders to offer more favorable terms to borrowers who might not qualify for conventional financing.
FHA Loan Benefits
💰
Low Down Payment
Only 3.5% down with a credit score of 580 or higher
📊
Flexible Credit
Minimum credit score of 500-580 (with 10% down)
🎁
Gift Funds Allowed
Entire down payment can come from gifts from family
🏠
Higher DTI Ratios
Debt-to-income ratios up to 50% or higher with compensating factors
💳
Assumable
FHA loans can be assumed by qualified buyers
🔧
Repair Financing
FHA 203(k) allows you to finance repairs into the mortgage
FHA Loan Requirements
Minimum Credit Score
- 580 or higher: 3.5% down payment
- 500-579: 10% down payment required
- Below 500: Not eligible for FHA financing
Down Payment Requirements
- Minimum 3.5% of purchase price (with 580+ credit score)
- Down payment can come from savings, gifts, or grants
- Seller can contribute up to 6% toward closing costs
- Down payment assistance programs accepted
Debt-to-Income Ratios
- Front-end ratio: Housing expenses should not exceed 31% of gross monthly income
- Back-end ratio: Total debts should not exceed 43% of gross monthly income
- Higher ratios (up to 50%+) possible with strong compensating factors
Employment & Income
- Steady employment for at least 2 years
- Can use multiple income sources: wages, self-employment, bonuses, commissions
- Income must be stable and likely to continue
- Part-time and seasonal income acceptable with 2-year history
Property Requirements
- Must be your primary residence (no investment properties)
- Property must meet FHA minimum property standards
- FHA appraisal required (checks value and property condition)
- 1-4 unit properties eligible
- Condos must be FHA-approved
FHA Mortgage Insurance (MIP)
FHA loans require mortgage insurance premium (MIP) to protect the lender. There are two types:
Upfront Mortgage Insurance Premium (UFMIP)
- Amount: 1.75% of the base loan amount
- Payment: Can be rolled into the loan (financed) or paid at closing
- Example: On a $400,000 loan, UFMIP = $7,000
Annual Mortgage Insurance Premium
- Rate: 0.55% to 0.85% annually (depends on loan amount, LTV, and term)
- Payment: Divided by 12 and paid monthly with your mortgage payment
- Duration: For loans over 90% LTV with terms over 15 years: Life of loan
- Duration: For loans 90% LTV or less OR 15-year terms: 11 years
⚠️ Important: Unlike conventional PMI, FHA mortgage insurance CANNOT be removed by reaching 20% equity on loans over 90% LTV. You must refinance to eliminate MIP.
California FHA Loan Limits (2024)
| County Type |
1 Unit |
2 Units |
3 Units |
4 Units |
| Standard Limit |
$498,257 |
$638,100 |
$771,450 |
$958,350 |
| High-Cost CA Counties |
$1,149,825 |
$1,472,250 |
$1,779,525 |
$2,211,600 |
High-cost counties include Los Angeles, Orange, San Diego, San Francisco, San Mateo, Santa Clara, Marin, and others. Contact me for specific county limits.
Types of FHA Loans
FHA 203(b) - Standard Purchase/Refinance
The most common FHA loan for purchasing or refinancing a primary residence. Fixed or adjustable rates available.
FHA 203(k) - Renovation Loan
Finance the purchase AND renovation costs in one loan. Two types:
- Standard 203(k): For major renovations over $35,000
- Limited 203(k): For minor repairs up to $35,000
FHA Streamline Refinance
Fast, simplified refinance for existing FHA borrowers. Benefits include:
- No appraisal required (in most cases)
- No income verification
- No credit check (lender's choice)
- Must result in net tangible benefit (lower payment or rate)
- Can only refinance existing FHA loans
FHA Cash-Out Refinance
Refinance your current mortgage and take cash out for any purpose. Maximum 80% LTV.
Who Should Consider an FHA Loan?
✅ FHA Might Be Right For You If:
- You have limited savings for down payment (less than 10%)
- Your credit score is between 580-680
- You've had past credit issues but have re-established good credit
- Your debt-to-income ratio is on the higher side (45-50%)
- You're a first-time homebuyer
- You need to use gift funds for down payment and closing costs
- You're buying a fixer-upper and want to finance repairs (203k)
❌ FHA May NOT Be Best If:
- You have excellent credit (740+) and can put 10-20% down (conventional may be cheaper)
- You want to eliminate mortgage insurance when you reach 20% equity
- You're buying an investment property (FHA requires primary residence)
- The property exceeds FHA loan limits
- You want to avoid ongoing mortgage insurance payments
FHA vs. Conventional: Which is Better?
| Feature |
FHA |
Conventional |
| Min. Down Payment |
3.5% |
3% |
| Min. Credit Score |
580 |
620 |
| Max DTI |
50%+ |
43-50% |
| Upfront Fee |
1.75% UFMIP |
None |
| Monthly MI |
0.55-0.85% |
0.3-1.5% |
| MI Removal |
Refinance only* |
At 80% LTV |
| Property Types |
Primary only |
All types |
| Assumable |
Yes |
Rarely |
*MIP can be removed after 11 years if original LTV was 90% or less, or loan term was 15 years or less.
Common FHA Questions
Can I buy a condo with an FHA loan?
Yes, but the condo complex must be FHA-approved. Many California condos are FHA-approved. I can check the FHA condo approval database for you.
Can I get an FHA loan with a bankruptcy or foreclosure?
Yes! FHA has more flexible guidelines:
- Bankruptcy (Chapter 7): 2 years after discharge
- Bankruptcy (Chapter 13): 1 year into plan with trustee approval
- Foreclosure: 3 years after completion
- Short Sale/DIL: 3 years after completion
How much are closing costs on an FHA loan?
Typically 2-5% of the purchase price. Sellers can contribute up to 6% toward your closing costs, which is more generous than conventional loans (3%).
Can I use FHA for a multi-family property?
Yes! FHA allows 2-4 unit properties as long as you occupy one unit as your primary residence. This is a great house-hacking strategy.
Do I need to be a first-time homebuyer?
No! FHA loans are available to any qualified borrower, whether first-time or repeat buyer. You just must occupy the property as your primary residence.
Ready to Get Started with FHA?
FHA loans are powerful tools for homebuyers who need flexibility and lower down payments. Let me analyze your situation and determine if FHA is your best option – or if another program might serve you better.