Types of FHA Home Loans and Which Is Right for You?

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Posted on June 9, 2021

If you’re looking for a flexible mortgage that works for borrowers with less-than-perfect credit, an FHA loan may be just what you need. 

fha loan types

If you’re thinking about an FHA loan, we can help you get financing so you can get into your new home.

So, what are the types of FHA loans?

Check out the different FHA loan types available to see which one matches your needs.

What is an FHA Loan?

When considering home loan types, FHA loans are a great option. They’re backed by the Federal Housing Administration (FHA), offer flexible underwriting guidelines, and have reasonable terms. 

It’s a great option for first time home buyers.

But here’s the thing:

You don’t have to be a first time home buyer to get an FHA loan.

It can be a great option if you don’t qualify for a conventional loan, whether you’re on your first, second, or fifth home purchase.

Because it’s a government-backed loan, FHA lenders can offer more flexible underwriting guidelines for borrowers.

How FHA Loans Work

An FHA loan is similar to a conventional mortgage in how it works. 

However, the FHA doesn’t process FHA loans. Instead, you secure it through an FHA-approved lender. 

Your lender handles everything—from getting pre-approved and submitting an application to setting a closing date.

However, the FHA insures the loan, which allows FHA loan requirements to be more flexible.

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FHA Loan Types

FHA loans have several options, starting with your standard purchase loan. They also offer other unique opportunities to make homeownership a reality for borrowers. 

Traditional FHA Loan Type 203b

A traditional FHA loan is a loan you can use to purchase a home. 

Borrowers typically need 3.5% down, depending on your credit score and other factors. 

However, the house must pass an appraisal before you can secure financing. That means the home must be worth at least as much as the sales price.

fha loan types

FHA 203(k) Rehab Loan

The FHA 203(k) Rehab loan has flexible underwriting guidelines like a traditional FHA loan. 

But it isn’t the same thing.

An FHA 203(k) loan gives you money to buy a home plus extra to cover the costs of fixing it up. 

It’s good for buying foreclosures or homes in less than optimal condition that need renovating to bring it up to code or be livable.

Here’s how that works:

You borrow the funds to cover the sales price plus enough to pay for contractors and materials for renovations. 

Construction to Permanent Loan

Want to build your own home?

You’re in luck! A Construction to Permanent (CP) loan provides the temporary financing needed to build the home.

Then, it converts to a permanent FHA mortgage after the home is built and move-in ready.

Title I Property Improvement Loan

Title I Property Improvement loans can give you money to fix up a home you already own. 

It’s beneficial if you don’t qualify for a traditional home equity loan.

If you borrow less than $7,500, the loan may be unsecured—meaning you don’t have to use your home as collateral. 

But loans over that amount? 

You’ll need to use your home as collateral to secure financing.

This 3-Digit Number Can Save You Thousands! 

The average credit score for new, approved home mortgages is 732 according to the FHFA while borrowers with a 600 credit score or less make up just 6.5% of approved home loans.

What's your credit score?  Give the Good News Lending team a call at 901-651-9935 to discuss your options.

FHA Energy Efficient Mortgage

The FHA Energy Efficient Mortgage (EEM) is available on new or existing homes.

It helps cover the cost of making energy efficiency changes to your home by including the costs in your mortgage.

You can roll the expenses of materials, labor, inspections, and a home energy assessment by a qualified energy assessor into your home loan.

When is an FHA Loan a Good Idea?

FHA loans are good for borrowers with less-than-perfect credit, little credit, or first time home buyers. 

But remember: You don’t have to be a first time home buyer to qualify for an FHA loan.

Because FHA loans have flexible guidelines, getting a home loan is possible after a negative credit event, such as a bankruptcy or foreclosure.

It can also allow you to get into a home with a smaller down payment.

What are the Downsides of an FHA Loan?

FHA loans have flexible underwriting guidelines and low down payment options.

However, like any financing option, there are some downsides:

  • You must pay FHA mortgage insurance for the life of the loan.
  • The FHA appraisal may be a little stricter than other loan programs.
  • There's a maximum amount you can borrow.

You Shouldn't Have To Choose

Too many borrowers think they must choose between the convenience of an online lender and the hands-on service you might get from the "small guys." 

But We Believe You Can Have It All!

How to Qualify for an FHA Loan

FHA loans are an excellent alternative to conventional home loans, which have stricter qualifying requirements.

To get an FHA loan, you must:

  • Meet the lender's minimum credit score requirements.
  • Choose a home that meets FHA appraisal guidelines.
  • Provide proof of stable income and employment.
  • Provide proof you have enough cash for the closing costs.

The requirements can vary between lenders, so ask about other factors they might require.

Other Options to Get a Mortgage

FHA loans are one loan option you have available. Two additional common home loan financing options include:

  • Conventional loans: If you have a solid credit score, stable income and employment, and cash saved for a down payment, a conventional loan may be a good option. 
  • VA loans: If you're a veteran or currently serve in the military, VA loans are a wonderful benefit. You can secure a home with no money down, and you won't pay mortgage insurance.

Did You Know?

Mortgage rates have hit all-time lows in recent months.  Some people have been able to take advantage of the opportunity and secure a historically low rate. Since rates change all the time, give us a call at 901-651-9935 for an up-to-date rate quote.

Get the Best Deal on an FHA Home Loan

If you’re looking for the best deal on an FHA loan, let Good New Lending help.

We have experience working with all home loan types, FHA included. We’ll help you choose the best FHA loan type for you and get you into a home you love.

Are you ready to buy your dream home? Contact us today to learn more!

About the Author

Ever since I was a child, I loved playing Monopoly and learned that borrowing money from the bank was actually a good thing.  "Your indebtedness today is your net worth tomorrow," my father would say!

I’ve been in the mortgage business since 2001 and we’ve helped countless families get the home of their dreams.

I believe the loan process should be the easiest part of buying a home. After all, your closing day should be a celebration, not a day of stress!

Wendy Thompson

Wendy Thompson - President of Good News Lending

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