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What Is An FHA Mortgage?

By Dan Green

FHA mortgages are mortgages insured by the Federal Housing Administration. They’re available via most mortgage lenders and require home buyers to make a minimum downpayment of 3.5 percent. FHA mortgage rates are typically lower than the market average.

What Is An FHA Mortgage?

An FHA mortgage is a low down payment mortgage loan that can be used to buy a home; and, to refinance one.

FHA mortgages aren’t meant to be a replacement for conventional loans; they’re meant to be an additional option to help you reach your goal of buying a house.

When buyers ask “Which is better: FHA loans or conventional loans?”, they’re generally wanting to know which loan gives them the best chance of getting approved, at the lowest rate, and with the fewest loan closing costs.

The answer is the FHA loan, sometimes.

Some of the best features of the FHA mortgage include:

FHA loans are also assumable , which mean that you can sell your home with its mortgage rate included — something that can help when mortgage rates are higher 10 years from now.

To get approved for an FHA mortgage, do three simple things.

First, apply for an FHA mortgage. You can do this either in-person with a lender, or online. You’re only requirement to apply is that you do not own a home with an FHA loan on it already; multiple FHA loans to one person is not allowed.

If you prefer to apply for mortgages online, talk with multiple lenders to get a feel for which you like best. Mortgages are a commodity product, and customer service is not.

Some mortgage lenders will do a better job of answering your questions honestly and patiently, and that may be important to you. Search for that lender, and you’ll find it.

What Might Your FHA Mortgage Payment Be?

Let us tell you!

Once you’ve selected a lender with which you’re comfortable, you’ll be asked to provide the paperwork necessary to approve your mortgage loan, which can usually be submitted using photos from your phone.

Most of the paperwork requested you’ll have readily available.

Lastly, your loan will be approved.

When your loan is approved, it means that your lender has done everything it needs to do to send money for your loan. In the industry, this is known as being cleared-to-close .

FHA loans can be cleared to close in as little as three weeks.

9 Great Things About The FHA Mortgage

You don’t need a 20% down payment to buy a home.

For example, you can buy a home with no money down if you’re a member of the U.S. armed forces, or if you live in a less-populated part of the country.

Or, if they’re offered in your area, you can also use one of the many down payment assistance programs available nationwide to help you buy a house with nothing out of pocket.

For everyone else, there’s the FHA mortgage.

The FHA mortgage is the most accessible and available low down payment mortgage for today’s home buyers. It’s also the simplest for which to get mortgage-qualified.

Here are some of the reasons to consider an FHA mortgage.

1. FHA mortgages require just 3.5% down payment

The FHA mortgage requires a down payment of just 3.5 percent, or $3,500 for every $100,000 in your home’s sale price. This is the most aggressive of all the low down payment mortgage programs available to today’s home buyers.

Plus, you don’t need to be a first-time home buyer to use an FHA mortgage. Anyone can use it.

2. The FHA mortgage program tries to include everybody

When you’re looking for a low down payment mortgage loan, the FHA loan is your best chance to get approved.

FHA mortgage guidelines don’t have special requirements like other low down payment mortgage programs such as the 100% VA loan, which requires that you’re a member of the U.S. military; or, the 100% USDA loan, which requires that you live in a less-densely populated area.

You don’t even need a social security number. FHA mortgages can be used by non-permanent resident aliens ; plus, employees of the World Bank and foreign embassies.

FHA mortgages can be used by almost anybody.

3. FHA mortgages are flexible on your credit score

FHA loans are super forgiving when it comes to credit scores.

You don’t need perfect credit to get approved for an FHA mortgage. You don’t need above-average credit, even. FHA mortgage guidelines instruct lenders to look beyond a person’s credit score and find the “bigger picture.”

The FHA doesn’t enforce a minimum credit score requirement. You can get an FHA approval with no credit score whatsoever.

4. FHA mortgages let you use a cash gift for down payment

The FHA mortgage program allows a home buyer’s entire down payment to be a cash gift.

When you use an FHA mortgage to buy a home, your 3.5% down payment can be a gift from parents or other relatives; from a charitable group or foundation; or, from a government home buyer program.

Few loan programs are as flexible with cash gifts for down payment .

5. FHA mortgages are available as fixed-rate or adjustable; as short-term or long-term

FHA mortgages come with options. You can use a fixed-rate mortgage , for which the mortgage rate won’t change for as long as you have the loan; or, an adjustable-rate mortgage , for which the rate adjusts each year based on the market.

You can also choose the number of years in your loan — either thirty years or fifteen.

This is different from other low down payment mortgages which may be limited. With an FHA mortgage, you can set your loan up exactly how it would be best for you.

6. FHA mortgages can be taken over in the future with no change in mortgage rates

FHA mortgages are assumable . This means that your FHA mortgage can be taken over in the future by the eventual buyer of your home, at the same mortgage rate you have today.

As a future home seller, having an assumable mortgage can give you a terrific advantage over other sellers — especially in a rising mortgage rate environment.

Imagine 5 years from now, being able to sell your house with your mortgage and its low rate attached. The future buyer of your home can inherit its FHA mortgage.

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7. You get access to the FHA Streamline Refinance

When you have an FHA mortgage, you get access to a special mortgage refinance program called the FHA Streamline Refinance.

The FHA Streamline Refinance is the simplest, quickest way to lower your mortgage rate with a refinance.

To get approved, all you have to do is show that you’re saving money. There’s no income verification with the FHA Streamline Refinance; and no employment verification, or credit score check.

Home appraisals are waived, too.

The only comparable program is the VA Streamline Refinance, which is available to homeowners with an existing VA home loan. For everybody else, refinances can take months to complete.

8. FHA mortgages are great for 2-unit, 3-unit, and 4-unit homes

FHA mortgages excel for home buyers looking at multi-unit properties, including 2-unit, 3-unit, and 4-unit homes. This is because FHA mortgage rates are ultra-low for multi-unit homes as compared to conventional loans.

If you’re a first-time home buyer looking to buy a duplex, triplex, or quadplex, with plans to rent out the other units, the FHA mortgage will nearly always be your top home loan option.

9. FHA closing costs are commonly paid by the home *seller*

The typical closing costs for an FHA loan are the same as for any other loan type. There is an appraisal cost, lender and third-party costs, and, in area that assess them, real estate sales taxes.

It’s also common for home sellers to pay FHA loan closing costs on behalf of their buyer using seller concessions for up to 6% of the price of home.

With seller concessions, 100% of FHA closing costs are paid by the seller; none are paid by the buyer.

The FHA also allows home buyers to use their lender’s zero-closing cost mortgage to pay for their closing costs.

Ask about your closing cost options when you get your FHA loan pre-approval.

FHA Mortgages Are The Original U.S. Home Loan

FHA mortgages are the “original” U.S. home loan.

The first FHA loan was made in 1934, pre-dating the first VA loan by 10 years, and the first conventional mortgage by 30 years.

1934 was in the middle of the Great Depression. Banks were struggling and had little interest in making loans tied to housing.

For a buyer to get a home loan, a down payment of fifty percent or more was required; and, buyers had to agree to some pretty terrible terms.

Not surprisingly, more than 60% of households were renters.

The government didn’t like this statistic. It believed that increasing the number of homeowners nationwide would help to end the depression. Homeowners build roots in a community and spend money there, which creates new jobs which pushes the economy ahead.

But, it was hard to become a homeowner during the Great Depression because banks were only making loans with unfriendly terms.

The U.S. government aimed to fix that.

In 1934, the government formed the Federal Housing Administration (FHA) , with the FHA-insured mortgage program at the agency’s heart.

Banks participating in the program were insured against “bad” mortgage loans, which protected the banks from a loss.

Banks loved the FHA program. All they had to do was make sure the loans they made were in keeping with the agency’s pre-published list of minimum qualification standards for a mortgage. If the loan met standards, it could be insured against loss.

With the FHA’s insurance system in place, down payment requirements fell and mortgage rates dropped. Homeownership rates increased nationwide, and the Great Depression ended.

Today, the FHA is a huge part of the U.S. housing market. The FHA insures more than 20% of new loans made every month; and, the FHA is the largest insurer of mortgages in the world.

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How Do I Qualify for an FHA Loan?

FHA mortgages have been available since 1934. They were created during the Great Depression to turn renters into homeowners and today — 84 years later — they’re as popular as ever.

Huge numbers of first-time home buyers use FHA mortgages to buy a home, making the minimum 3.5% down payment. Many more use FHA mortgages because of their attractive terms and relaxed approval standards.

Find out if an FHA mortgage is right for you. Click below to connect with a pro and apply for an FHA loan online.

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Written by Dan Green

Dan Green is a mortgage lending expert and the founder of Growella. Prior to Growella, Dan was a six-time, top-producing loan officer; and, ranked repeatedly among the top 1% of loan officers nationwide. Dan's home buying expertise has been in print and on TV with The Wall Street Journal, NPR, Forbes, CNBC, and others.

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