FHA Loan

An FHA loan is a great option for buying a home if you have a low to moderate income. It’s especially popular with first-time homebuyers because you don’t need a large down payment, and the credit requirements are more flexible than with conventional loans.

However, if you’re planning to finance major home renovations, an FHA loan might not be the best fit. RenoFi loans offer a smarter way to fund home improvements by letting you borrow based on your home’s future value after renovations.

In this guide, we’ll cover the details of FHA loans and when they make sense. But if renovations are your main goal, we’ll also explain why RenoFi loans could be a better option.

How FHA Loans Work

The Federal Housing Administration (FHA) loan is backed by the government, but you’ll work with a regular lender to get one. The FHA doesn’t actually lend the money, but it guarantees the loan. It’s their insurance that makes lenders more willing to give loans to borrowers with lower credit scores and smaller down payments.

Here’s a quick rundown of how the loan works:

You apply for the loan through a bank, credit union, or mortgage company that’s approved by the FHA. The lender will check your income, assets, credit score, and debt to see if you qualify. If approved, you’ll get a mortgage for 15 or 30 years.

With FHA loans, you’ll have to pay two types of mortgage insurance:

• An upfront fee of 1.75% of the loan amount
• An annual fee that’s 0.15% to 0.75% of the loan, depending on your down payment and term. You’ll pay this annual fee monthly. 

The FHA sets limits on how much you can borrow based on home prices in your area. In 2024, you can borrow anywhere from $498,257 to $1,149,825 with FHA loans. However, in places where construction costs are really high, such as Guam, Hawaii, Alaska, and the US Virgin Islands, the borrowing limits are even higher there.

Keep in mind that with FHA loans, the property you want to finance must be your primary residence and meet certain standards.

FHA Loan Requirements

To get an FHA loan, you need to meet a few important criteria, including your credit score and debt-to-income (DTI) ratio. We’ll cover those details later, but keep in mind that a higher credit score means you can put down less, and your DTI ratio should usually be under 43%.

History of Honoring Debts

When you apply for an FHA loan, your lender will look at your history with debts. They’ll check your payment record from the last two years to see if you’ve missed any payments on federal loans, such as taxes or student loans. If you’ve had a bankruptcy or foreclosure, you’ll typically need to wait at least two years before applying.

Employment and Income

Lenders also want to see steady employment. Ideally, you should have a consistent job history for the past two years, which they can verify with tax returns and pay stubs.

If you’re self-employed, you can still qualify if you have at least one year of income in your current field, as long as you have a solid work history in a related job before that. Your income needs to be enough to cover your mortgage payments and other expenses, too.

Property Requirements

The property you want to finance needs to meet specific requirements:

• The home must be your primary residence, meaning it should be where you live most of the time.
• You need to move in within 60 days of closing on the loan.
• The property must meet certain safety and livability standards set by the FHA to ensure it’s a suitable home.
• The home must fall within FHA loan limits, which can vary based on local home prices.

How to Qualify for an FHA Loan

If you’re considering an FHA loan, here are the requirements you need to meet:

• Citizenship: First off, you need to be a US citizen or a lawful permanent resident. This is a basic requirement for all FHA loans.
• Credit Score: To snag the best deal with a down payment of just 3.5%, you’ll need a credit score of at least 580. If your score falls between 500 and 579, you can still qualify, but you’ll need to put down at least 10%. Unfortunately, if your credit score is below 500, you won’t be eligible for an FHA loan.
• DTI Ratio: Lenders will also take a look at your to figure out if you can handle the mortgage payments. Generally, they prefer a DTI of 31% or lower, but some may accept ratios as high as 43%, depending on the lender’s policies.
• Purchase Price Limits: Lastly, keep in mind that FHA loans come with price limits on the homes you can buy. These limits vary based on where you live, so it’s important to check what the maximum amount is in your area. You can use the handy FHA Mortgage Limits lookup tool to find the specific limits for your county.

How to Apply for an FHA Loan

To apply for an FHA loan, follow these simple steps:

1. Find an FHA-Approved Lender

Start by looking for a lender that offers FHA loans. Most banks, credit unions, and online lenders can help you out.

2. Gather Your Documents

Get your documents ready to support your application. You’ll typically need proof of income, bank statements, and some form of ID.

4. Fill Out the Application

Next, fill out the loan application. Many lenders let you do this online, which is super convenient. Make sure to provide accurate information.

5. Submit Your Application

After you complete the application, send it in along with your supporting documents. Your lender will review everything and may ask for more information if needed.

6. Wait for Approval

The approval process usually takes about 30 to 60 days, depending on the lender and how quickly they can verify your information. During this time, they’ll check your creditworthiness and the value of the property you want to buy.

7. Review Loan Offers

Once you’re approved, you’ll get loan offers from your lender. Take some time to compare these offers so you can find the best terms and interest rates for your situation.

8. Close the Loan

After you choose the best loan offer, sign the final paperwork to close the deal and officially secure your FHA loan.

Benefits of FHA Loans

• Low Down Payment: One of the best things about FHA loans is that it lets you get into a home with just a 3.5% down payment. For example, that’s only $10,500 on a $300,000 home, so you don’t need to save up a ton of cash.
• Easier Credit Score Requirements: FHA loans are pretty forgiving when it comes to credit. You can qualify with a credit score as low as 580, and even if your score is a bit lower (between 500 and 579), you might still be able to qualify with a 10% down payment.
• No Income Limits: FHA loans don’t have strict income caps, which means you can take advantage of this option even if you’re doing financially well but have credit problems.
• Multiple Property Options: FHA loans allow you to finance different types of properties, including a single-family home, a condo, or even a multifamily property.
• Lower PMI Costs: FHA loans offer lower PMI costs compared to conventional loans.

Drawbacks of FHA Loans

• Loan Limits: FHA loans come with borrowing limits that can differ depending on where you live. So, if you have your eye on a more expensive home, you might run into some limits.
• Higher Mortgage Insurance Overall: While the PMI costs might be lower, FHA loans require both an upfront mortgage insurance premium and an annual one. This can make your monthly payments a bit heftier.
• Strict Property Standards: Although you can use an FHA 203(k) loan (which is a type of FHA loan) to buy and renovate a fixer-upper, there are some strict rules about the property’s condition. It has to meet certain health and safety standards, which can be a bit of a hassle. 
• Ongoing Mortgage Insurance: If you put down less than 10%, you’ll need to carry mortgage insurance for the life of the loan. This could raise your monthly payments a bit compared to conventional loans.

FHA Loan Alternatives

FHA loans are mainly for purchasing a home and are not typically used for renovations, unless you’re refinancing. If you’re looking to make home upgrades, an FHA loan might not quite fit your needs. That said, there are several alternatives you might want to consider. 

1. RenoFi Loans

If you’re looking to renovate your home, RenoFi loans are an excellent alternative. They allow you to finance renovations based on the future value of the home post-renovation, which can help you tackle larger projects without the need for a hefty down payment. 

See how RenoFi Loans work.

2. Conventional Loans

These loans offer greater flexibility with the types of properties you can buy. And in some cases, the mortgage insurance costs are lower compared to FHA loans. Keep in mind that conventional loans aren’t backed by the government and may have stricter credit requirements.

3. VA Loans

If you’re a military veteran or active-duty service member, the Department of Veterans Affairs (VA) loans are definitely worth looking into. VA loans usually don’t require a down payment and have no mortgage insurance, which can make them a pretty cost-effective choice.

4. USDA Loans

The US Department of Agriculture (USDA) loans are designed for people looking to buy homes in rural areas. If your income is low to moderate and you’re interested in a home in a rural location, you might qualify for this no down payment loan.

5. Home Equity Loans and HELOCs

If you already own a home and want to do some major upgrades, home equity loans and HELOCs let you tap into your home’s equity for renovations or other expenses. They can offer flexibility and potentially lower interest rates.

Why a RenoFi Loan Is a Better Alternative

All the financing options we’ve covered have their perks, but RenoFi loans have a unique advantage when it comes to borrowing power. Even traditional home equity loans and HELOCs, which are pretty flexible, don’t quite measure up to what RenoFi offers.

Take a traditional 90% LTV HELOC, for example—it might seem like a solid choice for funding a home renovation, but it often falls short when your existing equity isn’t enough to cover everything you want to do. That’s where RenoFi loans shine – they factor in your home’s After Renovation Value to give you more equity to work with.

For instance, let’s say your home is currently worth $500,000, and you still owe $400,000 on your mortgage. You’re planning some renovations and think your home’s value will jump to around $640,000 afterward. Right now, your loan-to-value ratio (LTV) is 80%, which means you basically can’t borrow anything for your renovation. However, with a RenoFi loan, you could go up to 150% LTV or 90% LTV using that after-renovation value.

In this example, a regular home equity loan would leave you with $0 in borrowing power, but a RenoFi loan could let you borrow up to $176,000, thanks to your home’s new value after renovations!

If you’re considering a home renovation, RenoFi is hands down the smartest way to finance it. 

Find Out How RenoFi Can Finance Your Renovation

No doubt, an FHA loan offers many benefits, but it may not be a good fit for everyone. If you plan to make some major home improvements, a RenoFi loan should definitely be on your radar. This option gives you plenty of borrowing power and is a lot easier to qualify for.

Additionally, our RenoFi loans are the smartest way to finance a home renovation project. Unlike traditional loans, which are based on your current home value or require you to refinance your primary mortgage and give up your low rate, RenoFi loans are based on the after-renovation value of your home. This allows you to borrow, on average, 11x more, get a low monthly payment, and keep your low rate on your first mortgage.

Get in touch with us today to learn more about how RenoFi can help you finance your dream renovation.