What Is the FHA?
FHA Loan Programs are a type of federal assistance to make home buying possible for those who may not be able to qualify for a conventional loan. The FHA, or Federal Housing Administration, is not a direct lender. It is a government agency that insures loans from private lending institutions. The FHA has insured home loans since 1934. The FHA is the only government agency that operates entirely from its self-generated income (in the form of mortgage premiums), and costs the taxpayers nothing.
Do FHA Loan Programs Require Only 3.5% Down Payment?
Yes, they do! Here are the main features of FHA loan programs:
- 3.5% Down Payment
- Home must be owner-occupied
- 15-year and 30-year loan terms
- Loan limit for San Diego County is $1,006,260 effective January 1, 2024 (check here for limits in other areas)
- Jumbo loans available for a surcharge
- Interest rates often lower than conventional loans
- Monthly mortgage insurance often lower than conventional loans
- Credit requirements may be more flexible than for conventional loans
- FHA Mortgage Insurance charged throughout the life of the loan (see below)
- No prepayment penalty (effective 1/21/15)
- Cal-EEM + GRANT Program – Energy Efficient Mortgages and Grants available (see below)
- FHA 203k Rehab loans available for fixer-uppers (see below)
- FHA Streamline Refinance (see below)
- Reverse Mortgage – FHA Home Equity Conversion Mortgage (see below)
- Down Payment Assistance for low- to median-income borrowers (see below)
How is FHA Mortgage Insurance Charged?
All FHA loan programs charge mortgage insurance premiums. Mortgage insurance fees for FHA loans have changed over time. The most recent change (a decrease) was announced on February 22, 2023.
There are two types of FHA Mortgage Insurance that are added to every FHA loan:
- Up Front Mortgage Insurance Premium (UFMIP) – 1.75% of the loan amount, usually financed into the loan.
- Monthly Mortgage Insurance Premium (MIP) – the cost of this premium varies, depending on terms and the loan-to-value ratio. For a 30-year loan term with 3.5% down payment, the monthly MIP is .55% of the total loan amount, divided by 12.
FHA Mortgage Insurance : An Example
For a 30-Year Fixed FHA loan with a 3.5% down payment:
Purchase Price: $350,000
3.5% Down Payment: $12,250
Initial loan amount: $350,000 – $12,250 = $337,750
1.75% Up Front Mortgage Insurance (UFMIP), financed into the loan: $5910.63
(1.75% x $337,750 = $5910.63)
Total loan amount is $337,750 initial loan amount + $5910.63 UFMIP = $343,660.63
.55% Monthly Mortgage Insurance Premium (MIP), paid monthly for the life of the loan: $157.51
(.55% of the total loan amount of $343,660.63, divided by 12 = $157.51)
That’s $56,703.60 in monthly MIP over the course of the 30 year loan! This is why many borrowers choose to refinance out of FHA loan programs once they have enough equity to qualify for a conventional loan.
Cal-EEM + GRANT Program
The CalHFA Energy Efficient Mortgage + Grant (Cal-EEM + GRANT) Loan Program combines an FHA-insured first mortgage loan (Cal-EEM), with an additional EEM Grant. This Grant is to help pay for energy efficient improvements over and above the maximum allowable FHA EEM loan amount.
The Energy Efficient Mortgage already lets a homebuyer borrow additional funds for energy improvements. The total allowable costs of the improvements that may be eligible for financing as part of the loan is either 5% of the property’s value, not to exceed $8,000, or $4,000, whichever is greater.
The CalHFA EEM Grant is for up to 4% of the first mortgage total loan amount, including Up Front Mortgage Insurance Premium. If a homeowner stays in the home for three years, the 4% grant is completely forgiven, and the homeowner does not have to pay it back. This makes the EEM Grant one of the best FHA loan programs currently available.
The Cal-EEM + GRANT program can be combined with the ECTP, described above. Cal-EEM is for purchase transactions only. Refinances are not allowed. This program is not limited to first-time home borrowers. Even if you have owned a home in the past three years, you can qualify for this program. However, at the time of loan closing, you can’t have any other ownership interest in another residential dwelling. You need to occupy the property as your primary residence within 60 days of closing.
Energy Efficient Improvements
Examples of improvements that qualify for funding include:
- New HVAC system
- Fixing or replacing a chimney
- Insulation of attics, crawl spaces, pipes, ducts
- Weatherstripping
- Energy Star sliding glass doors and windows
- Installation of active and passive solar technologies
- New energy-efficient refrigerator and/or dishwasher
A Home Energy Rating System (HERS) report is required. (Read more about Home Energy Assessments.) This HERS report will identify qualifying energy improvements for your property. You can also read about other ways to finance green upgrades.
Example – Cal-EEM + GRANT
$500,000 home purchase price
Maximum financed improvements with EEM: $8,000
4% Grant (based on loan amount, including up front mortgage insurance): approximately $19,800
TOTAL FUNDS AVAILABLE FOR ENERGY IMPROVEMENTS: $27,800
FHA 203k Renovation Loans
FHA-insured renovation loans are one of my favorite FHA loan programs. FHA 203k loans are for owner-occupied homes only. The minimum down payment is 3.5%. The minimum qualifying FICO score is 640. The loan can be either a 30-year fixed rate mortgage, or a 5/1 ARM (adjustable rate mortgage). For non-condominium properties, the loan can be based on as much as 110% of the appraised value. For example, you buy a $300,000 home and plan to complete $30,000 in renovations. The appraiser values the home with renovations at $330,000. You can apply for a renovation loan based on 110% of that value, or $363,000. So if you put 3.5% down, which is $12,705, the loan amount will be $350,295. Renovation loans for condos are limited to 100% of the appraised value, and can finance interior work only.
FHA 203k renovation loans do not pay for swimming pools, window treatments, used appliances, or luxury items. You have 120 days to complete renovations, and they must begin within 30 days of close of escrow.
Another feature of the FHA 203k renovation loans is the ability to finance mortgage payments. If you can’t live in the home due to the extent of the construction, meaning if the property isn’t habitable, the total mortgage payments during the construction can be included in the renovation loan amount. That’s up to six months of mortgage payments while your home is being renovated!
To learn more about loan programs to improve your home, read my article about Renovation Loans.
FHA Refinance
You can refinance an existing FHA loan with a new FHA loan, called an FHA Streamline Refinance. No appraisal is necessary, so you can refinance even if you are underwater on your home. If you have had the original FHA loan for fewer than 36 months, you will receive a partial refund of the Up-Front Mortgage Insurance Premium (UFMIP). After one month, the refund is 80%, which then decreases by 2% for every month for the next 35 months.
Read my article about Refinancing Closing Costs to learn more about the FHA Streamline Refinance.
FHA Reverse Mortgage
The FHA also offers a reverse mortgage program for seniors, called a Home Equity Conversion Mortgage (HECM). You can use this program to buy or refinance a home, and pay no monthly mortgage payment. Read my article about Reverse Mortgage Costs to learn all about the FHA HECM program.
Down Payment Assistance
Low- to median-income borrowers may qualify for down payment assistance. Lenders can layer some programs on top of each other, to maximize your benefit.
Use the California Association of REALTORS® Down Payment Resource Tool to check all available programs. Here are links to my articles about some popular down payment programs:
- CalHFA Down Payment Assistance – deferred loans for first-time home buyers (haven’t owned a home in 3 years)
- San Diego Housing Commission – deferred loans and grants
- Fannie Mae HomePath Ready Buyer Program – grants up to 3% for Fannie Mae owned homes
- Golden State Finance Authority – grants up to 5% for down payment and closing costs
The Bottom Line
Recent policy changes have made FHA loan programs even more accessible to certain borrowers. These programs don’t come for free, however. Unlike conventional loans, which cancel mortgage insurance with a certain level of equity, most FHA loan programs charge mortgage insurance premiums throughout the life of the loan.
On the other hand, FHA interest rates tend to be lower than those for conventional home loans, and the monthly mortgage insurance may also be lower than conventional mortgage insurance. Many FHA borrowers wait to build at least 20% equity in their home, and then refinance into a conventional loan. Learn more about Mortgage Refinancing Closing Costs.
If you are eligible for a VA loan, take advantage of it – VA loans offer 100% financing (NO down payment!), no monthly mortgage insurance, and lenders can usually offer lower interest rates and higher lender credits, compared to conventional loans.
If you’re considering financing real estate, consult an experienced loan officer who stays up-to-date with these changes in loan programs and rules, and who can determine the best loan package for you.
As always, contact me with any questions.
