Types of FHA Loans

An FHA loan, from the Federal Housing Administration, is a loan insured by FHA. The FHA must approve a lender, before the lender can originate FHA backed loans. When FHA insures the loan, it reduces the risk associated with borrower defaults. The FHA program started after the Great Depression to address mortgage defaults. There are different loan programs available under the FHA program. Some of the most popular FHA loan programs are reviewed below.

Fixed-Rate FHA Loan

This type is the most popular FHA loan. It is also known as a 203(b) federally-guaranteed loan. There is no minimum income requirement to qualify for this loan. However, states impose certain debt ratios to become eligible for this loan. The loan processors will require borrowers to present income and debt details to determine eligibility. The loan allows homebuyers to borrow up to 97% of the home value. It also allows borrowers to accept gifts towards closing costs.

Energy Efficient Mortgage

If a borrower qualifies for the fixed-rate 203(b) loan program, then the borrower is also eligible for the FHA energy efficient mortgage program. The energy efficient mortgage program seeks to help homeowners lower their energy costs. The program allows borrowers to add the expenses generated by energy efficiency improvements into an existing or new loan. You must engage an approved energy consultant or a home energy rating system to determine the cost of new energy improvements. The cost of energy inspection may be added to the loan proceedings.

Graduated Payment Mortgages

The graduated payment mortgage plan or Section 245 allows eligible borrowers to choose a lower payment initially. They can increase the monthly payments gradually as their income grows. The program allows a borrower to choose an increase of 2.5, 5, or 7% increase in the interest rate during the initial 5 years. Another option is to increase the rate at 2 to 3% every year for the first 10 years. The borrower will pay a constant amount for the remaining loan duration.

FHA Loans for Condominium units

The FHA loan program for condominium units is also known as 234(c). This loan is similar to the fixed rate 203(b) loans. The loan is available if you are living in a condo community with at least 4 units. The objective is to make homes affordable for low- and middle-incomes families. The loan program insures the loan for 30 years. Borrowers are allowed to borrow up to 97% of the loan value. FHA requires that at least 80% of the loans must be granted to occupants who are also owners. The amount of the loan depends on the location and number of units.

Growing Equity Mortgages

This program, also known as 245(a), allows borrowers with low income to gradually increase the payments every year. This helps low income borrowers to afford a home with lower payments initially. The growing equity mortgage plan allows monthly payments to grow by 1 to 5% every year. You are eligible for this program, if you anticipate your income to grow in future.

Last Updated: December 21, 2015