FHA Loans: Myths vs. Reality for Homebuyers

An FHA loan is a great option for aspiring home buyers, but there are a lot of myths and misconceptions that surround them. You might have heard that FHA loans are only for people with bad credit. You may have also heard that they’re more expensive than conventional loans, and that you can’t use them to buy certain types of properties. However, FHA loans have many advantages. Understanding how they work can help you make better decisions about financing your home purchase.

What is an FHA Loan?

An FHA loan is a mortgage insured by the Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD). The FHA doesn’t lend money to home buyers directly. Instead, it insures loans made by approved lenders. By doing this, the FHA reduces the risk for banks and allows them to offer more favorable terms to borrowers, especially borrowers who may not qualify for conventional mortgages.

Common FHA Loan Myths

FHA loans are often misunderstood and maligned for no good reason. Here are the most common myths about them.

Myth 1: FHA Loans Are Only for New Homeowners

You don’t have to be a first-time buyer to get FHA financing. The reality is that anyone who meets the qualification requirements can get an FHA loan, regardless of whether they’ve owned a home before. The only restriction is that the home you’re buying has to serve as your primary residence.

Myth 2: FHA Loans Are for People with Bad Credit

While FHA loans make mortgages accessible to buyers with lower credit scores, they’re not just for people with poor credit. The main advantage of FHA loans is their flexibility. They allow buyers with good credit or limited credit history to qualify for a mortgage with a low down payment.

Myth 3: You Can Only Use an FHA Loan for a Single-Family Home

In reality, you can use an FHA loan to purchase a duplex, triplex, or fourplex as long as you plan to live in one of the units. That means you can become a homeowner and also earn rental income to help with your mortgage. This option is also great for multi-generational families who want to live in the same building.

Myth 4: You Need a W2 Job for an FDA Loan

You don’t have to have W2 income to qualify for an FDA loan. If you’re self-employed, receive Social Security, child support, or other forms of income, you can still get an FHA loan. You just need documentation to back up that you have a reliable source of income sufficient to pay your mortgage and service your other debt.

Myth 5: If One Lender Denies Your FHA Loan Application, All Others Will Too.

Getting turned down by one lender doesn’t mean you can’t get an FHA loan. Different lenders have different approval standards that go beyond FHA’s basic requirements. It’s a good idea to apply with multiple lenders; however, you should do so within a short window to prevent a negative impact on your credit report.

Myth 6: You Pay More for an FHA vs a Conventional Loan

While FHA loans require mortgage insurance, they often have competitive interest rates and lower down payment requirements. That can make an FHA loan more affordable overall.

Myth 7: You Can’t Buy Condos with FHA Loans

You can buy condos with FHA loans, but the condo complex has to be on the FHA approved condos list. For a condo complex to be FHA-approved, it has to meet certain requirements, including stable financial management, no excessive commercial space, proper insurance coverage, and adequate funds for maintenance. In addition, at least 50% of the units must be occupied by their owners.

If the condo community you want to buy in is not already on the list, you can apply to have a single unit approved, but be advised that approval for individual units is not always available, and that you may have fewer financing options.

Myth 8: There Are No FHA Loan Limits

There are FHA loan limits, but they vary by the type of property and the geographical area, with more expensive areas having higher limits. To find the FHA loan limits for your area, check the HUD website or consult with your real estate agent.

This table gives an overview of the lowest and highest FDA loan limits across the country. Special limits apply to Alaska, Hawaii, Guam and the Virgin Islands due to the significantly higher housing costs in those areas.

Myth 9: FHA Loans Can’t Be Used for New Construction

If you want to build a house from the ground up, you can apply for an FHA construction loan. Formally known as an FHA Construction-to-Permanent loan, an FHA construction loan combines the land purchase, property construction, and permanent financing into one loan product.

There are some restrictions on an FHA construction loan. These include:

• The home has to be your primary residence, not an investment or vacation property.
• You have to use a licensed contractor; you can’t do the building yourself unless you are a contractor.
• The total loan (land + construction + closing costs) has to stay within FHA limits for your area.
• The finished home has to comply with FHA health, safety, and livability guidelines. Because of this, it is wise to check your home plans against compliance standards in advance.

A related option to an FHA construction loan is an FHA 203(k) Loan, also called an FHA home renovation loan. This type of loan allows you to consider homes that need work, including foreclosures and fixer-uppers. The financing includes the cost of buying the house and renovating it. Restrictions also apply to FHA 203(k) loans.

FHA loans are designed to make homeownership more accessible and affordable for everyday Americans, and they’ve helped millions of people who might not have qualified for conventional financing. Don’t let myths and misconceptions prevent you from looking into whether an FDA loan is the right option for you.