The eight types of FHA loans
Now that you know more about what getting an FHA home loan entails, the next step is to look at the different kinds of loans that fall under FHA's umbrella. This information will give you a better idea of which type of FHA loan might work best for you.
Fixed-rate FHA loan
A fixed-rate FHA loan is by far the most popular FHA product on the market. With this type of loan, the interest rate stays the same over the life of the loan, which means homeowners always know what to expect in terms of their monthly payments.
Adjustable-rate FHA loan
As the name suggests, the interest rate on an adjustable-rate FHA loan can go up and down over time. Typically, these loans will offer lower interest rates in the first few years after you take out the loan. However, after that initial, introductory rate period is over, the interest rate adjusts in regular intervals according to prevailing market rates.
Manufactured (mobile) home loans
Few people realize that FHA loans can be used to buy manufactured homes (formerly known as mobile homes) and lots on which to put them. However, if you're thinking of going this route, there are few important differences that you need to know about.
For one, while the FHA loan limits for single-family homes are $356,362 or $822,375 in certain high-cost areas in 2021, this is not the case for manufactured homes. If you're buying both a manufactured home and a lot, the current FHA loan limits only extend to $92,904. Meanwhile, if you're just buying a manufactured home, the limit is $69,678, and it's $23,226 for just a lot.
You can expect an FHA loan for a manufactured home will also have a shorter loan term. In this case, if you've just purchased a lot, the maximum loan term is 15 years. However, if you've used the loan to finance a manufactured home, the maximum loan term extends to 20 years, whereas if you finance the purchase of both the home and the lot, it increases to 25 years.
Fortunately, FHA loans can also be used to finance certain condominiums. FHA condo loans are also known as Section 203(b) loans. Notably, condominiums must meet certain requirements in order to qualify for FHA financing. In this case, the complex must contain at least two units, it must be primarily residential, and it must be on an FHA-approved list. The maximum loan term for single-unit financing is 30 years.
FHA 203(k) loan
On the other hand, if you intend to purchase a home that needs significant repairs, you may want to look into getting an FHA 203(k) loan. This type of loan allows a portion of the mortgage to go to the seller of the property, while the remaining loan balance is put toward making repairs.
According to guidelines from the Department of Housing and Urban Development (HUD), the total cost of the repairs must exceed $5,000, and each repair must be considered eligible. The list of eligible activities is as follows:
- Structural repairs or alterations
- Modernization or improvements to the home's function
- Elimination of a health or safety hazard
- Changes to improve appearance or eliminate obsolete features
- Replacing plumbing, including a well and septic system
- Adding or replacing flooring
- Making necessary accessibility accommodations for those with disabilities
- Major landscaping work
- Replacing roofing, gutters, or downspouts
- Energy conservation improvements
Home equity conversion mortgage (HECM)
The home equity conservation mortgage (HECM) is the FHA's take on a reverse mortgage. This mortgage is meant to help eligible seniors supplement their income by leveraging the equity they've built up in their homes.
In this case, rather than making a monthly mortgage payment, the seniors will draw against their equity and receive income. With an HECM, they can either receive regular, monthly payments, or they can take out a line of credit, which will allow them to receive lump-sum amounts. Then, once the home is sold or the homeowners no longer reside there, any accumulated debt becomes due to be paid in full.
Graduated payment mortgage (GPM) and graduated equity mortgage (GEM)
Borrowers who expect their income to rise substantially over time may want to consider FHA's graduated payment and graduated equity mortgages. At base, these loans are structured so that the borrower's mortgage payment steadily increases over time. However, there are some slight differences between the two:
- Graduated payment mortgage (GPM): With a graduated payment mortgage, the payments increase annually, and the difference between the lower payment and what would be required with a traditional fixed-rate FHA loan is added to the total principal balance. GPM loans are available for single-family homes and condominiums.
- Graduated equity mortgage (GEM): With a GEM, on the other hand, the increases in monthly payments result in a shorter loan term and savings for the borrower. Unfortunately, GEM loans are limited to single-family homes.
Energy-efficient mortgage program
As you might be able to guess, the energy-efficient mortgage program helps borrowers to finance the cost of energy-saving home improvements, provided that the proposed improvements will cost the same or less as the amount you'll save on your energy bills.
While there is technically no maximum purchase price that can be financed using this program, eligible improvements must meet the following criteria:
- The improvements must be deemed cost-effective during a home energy assessment.
- They must be worth less than 5% of the home's adjusted value, 115% of the median area price for a single-family home, or 150% of the national conforming mortgage loan limit.
The bottom line on choosing FHA home loans
In the end, there are quite a few FHA loan options to choose from. While this type of mortgage loan is a great fit for those who have lower credit scores and can't afford to put too much money toward their closing costs, buyers and investors with a more solid financial profile may be better served with a conventional loan, where they can usually find lower interest rates and fewer fees.
Still, if you think an FHA loan might be the right fit for you, consider reaching out to an FHA lender in your area. They will be able to answer any questions about this type of loan and walk you through the application process.