Mortgages & Creative Financing

What’s Great (& Not So Great) About FHA Loans

Expertise: Mortgages & Creative Financing, Business Management, Landlording & Rental Properties, Commercial Real Estate, Real Estate Deal Analysis & Advice, Real Estate Investing Basics, Personal Development
173 Articles Written
Paper titled FHA loan staked on top of spreadsheets on a table with a pen and glasses

FHA loans are, in my opinion, one of the absolute best ways to get started in buy and hold real estate.

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

As I’ve noted before, they’re a particularly great place to begin for “save and hold” investors, as they can finance 96.5 percent of the price of a deal at very low interest rates for a homeowner’s property.

What’s even better, you can finance up to a fourplex. So, why not buy a fourplex, live in one unit, and rent out the other three?

Here’s what you need to know about FHAs, including the advantages and disadvantages compared to conventional loans.

What Is an FHA Loan?

FHA loans are a mortgage issued by a lender that’s approved by the Federal Housing Administration (FHA), which is a U.S. government agency. These mortgages are insured by the FHA, and as mentioned above, require only 3.5 percent down. They are usually amortized over 30 years, and the interest rate is also quite low.

In addition, if the property needs rehab, the Federal Housing Administration has a similar product designed for such properties called a 203K loan. You should be able to inquire about these products with pretty much any mortgage broker.

The ceiling price for an FHA loan depends on the market you're buying in but will usually encompass just about any starter home. As of this writing, in some higher-priced coastal markets that can be as high as $726,525. (How they come up with such odd limits is a mystery to me.)

The primary qualifications for an FHA loan are as follows:

  • 580+ FICO score
  • 43 percent debt-to-income ratio
  • Two years’ employment
  • Owner occupied property

However, there are a few other smaller qualifications and a little bit of wiggle room in some areas. For example, a FICO score between 500 and 579 may be accepted, but the down payment would need to be 10 percent instead of 3.5 percent.

And while I think FHA loans are great, whether they make sense for you and your unique situation is another story.

Now let’s go over some of the major advantages and disadvantages to FHA loans.

Close up view of bookkeeper or financial inspector hands making report, calculating or checking balance. Home finances, investment, economy, saving money or insurance concept

Related: FHA Guidelines: How to Qualify for a 3.5% Down Loan

Advantages of FHA Loans

1. Great Interest Rate

You are almost always going to find better interest rates for owner occupied properties than investment properties. My own house, for example, has an interest rate of 4.125 percent while most of my company’s and my investment properties have interest rates between 5 and 5.5 percent.

And FHA loans usually beat other conventional loans, as well. While interest rates have risen over the past few years, even now Bankrate.com estimates an FHA loan will come in at 4.5 percent while a conventional 30-year mortgage for an owner occupied home will be around 4.85 percent.

2. High Loan-to-Value Ratio

I’ve grown fond of saying, “You’re not a real estate investor unless you’re cash poor.”

Of course, this is not a mindset you want to have forever. But because real estate is so expensive, it's hard to keep large cash reserves—at least in the beginning. And given this problem, an FHA loan's low down payment requirement is one of its biggest advantages. If your FICO score is above 580, you can finance up to 96.5 percent of the purchase (and rehab with a 203K loan).

For those who are just getting started in real estate investing and don't have a lot of capital to invest, this provides an excellent entry point. That's especially true if you can get a good deal on the property and refinance out in a few years with a conventional loan. (You can only have one FHA loan in your name at a time.)

Then, after the refinance, you can consider buying another property with an FHA loan and moving there. Why not?

3. You Can Buy up to a Fourplex

FHA loans can be used on houses or anything up to a fourplex. So, as I said above, why not go the latter route and rent out the other three units?

By doing so, you can pretty much have the other tenants pay your mortgage while you live for free or close to free. All the while, principal paydown and property appreciation are working in your favor to build long-term wealth.

Mortgage loan agreement application with house shaped keyring

Related: Investment Property Loans: The Ultimate Guide to Funding Your Deals

Disadvantages of FHA Loans

As with all good things though, there are downsides. The biggest disadvantages to FHA loans are as follows.

1. You Must Live in the Property and Can Only Buy up to a Fourplex

The first downside might seem counterintuitive since it’s also mentioned above in the advantages: you can’t buy any property larger than a fourplex. Plus, you must live in the property for at least a year.

If you are already settled in your current home, this is a pretty big problem and would likely make an FHA loan unappealing.

Or perhaps your spouse isn’t too keen on the idea. Or perhaps you have a family and living in a duplex or fourplex just doesn’t make a lot of sense to you.

In such cases, you could still take advantage of an FHA loan to get good financing on a house. Unfortunately, you wouldn't be able to take full advantage of it with a multifamily property.

2. Somewhat Tedious Approval Process

Whenever you deal with the government, there are going to be some hoops to jump through. As such, FHA loans are more arduous than conventional financing and don’t have as much flexibility.

For example, a bank might be able to get you approved for a conventional loan with only one year of employment history. However, two years are required to be approved for an FHA loan.

So, if you do plan on using an FHA loan to buy a property, you should make sure to get approved for it in advance.

3. Mortgage Insurance

In my opinion, the worst part about FHA loans is the mortgage insurance. Any loan that is financed over 80 percent of the property's appraised value will require mortgage insurance, which simply insures the lender for losses because such high LTV loans are obviously riskier.

Mortgage insurance in general usually adds 0.5 to 1 percent of the loan's balance to your payment each year. FHA loans specifically now cost 0.85 percent of the loan for the life of the loan (if the down payment is under 5 percent). So, for a $100,000 loan, the PMI would amount to $850 per year, or $70.83 per month.

Since a $100,000 loan at 4.5 percent interest amortized over 30 years would cost $507 per month, this adds almost 14 percent to each payment for an effective interest rate of about 5.65 percent.

FHA loans also generally come with a few extra fees over conventional loans.

Conclusion

While FHA loans are not without their downsides, they still present a great opportunity, particularly for new investors. Anyone with a job who is looking to get into real estate and doesn't have a lot of capital to begin with should seriously consider using an FHA loan to get started.

What else can I tell you about FHA loans? Do you think they’re a good option for first-time home buyers? Why or why not?

Let me know in a comment below.

Andrew Syrios has been investing in real estate for over a decade and is a partner with Stewardship Investments, LLC along with his brother Phillip and father Bill. Stewardship Investments focuses on the BRRRR strategy—buying, rehabbing and renting out houses and apartments throughout the Kansas City area. Today, they have over 300 properties and just under 500 units. Stewardship Properties on the whole has just under 1,000 units in six states. Andrew received a Bachelor's degree in Business Administration from the University of Oregon with honors and his Masters in Entrepreneurial Real Estate from the University of Missouri in Kansas City. He has also obtained his CCIM designation (Certified Commercial Investment Member). Andrew has been a writer for BiggerPockets on real estate and business management since 2015. He has also contributed to Think Realty Magazine, REI Club, Elite Daily, Thought Catalog, The Data Driven Investor and Alley Watch.

    The German
    Replied about 11 years ago
    I believe that the best real estate sales happen in the country side. It is a win-win situation and that is a market that can never slow down. In an area like rural Germany or France, the vistas are so beautiful that people can’t resist it. And the price is also pretty realistic. Nice article and all the 4 points make sense. Thanks 🙂
    Crystal Tost
    Replied about 9 years ago
    I find the advertising in other countries and in mediums that are not real estate related a waster of money and time. I think targeted advertising coupled with good pricing and proper presentation will get the house sold to a local buyer that is likely out there as we speak. Why focus on an audience that you are not even sure exists in mediums that are not targeted?
    David Grbich
    Replied over 8 years ago
    Setting a realistic list price at 10% below market may lead to a very lonely existence as a realtor – not many sellers in the California market have the equity to price 10% below market – but yes that should get the home sold. Great point overall – thanks.
    Ken Bailey Contractor from yucca valley, ca
    Replied 7 months ago
    Thanks Andrew, Always wanted to know exactly how an FHA loan applied. Once again excellent article. Thank You
    Colin Burke from Bozeman, MT
    Replied 6 months ago
    So someone don’t really need to be a “first time” homebuyer for an FHA loan, they just need to not have a current FHA loan in their name? How long after receiving the FHA loan can you refinance, if you don’t want to continue living in the unit?
    Krystal Todd Accountant from Hollywood, Fl
    Replied 6 months ago
    I believe you have to not have owned a home in the past 3 years, even if you currently own a home with another loan product. I am not sure about the refinance piece, but I do know some lenders would like to see around 20% equity in the home before refinancing but you may find lenders that will allow a higher loan to value. Hope this helps!
    Sean Psaradelis
    Replied 6 months ago
    Colin, anyone can obtain an FHA loan, no matter if you have owned or not. If you do have an FHA loan in your name, you can still get another FHA loan but there are certain restrictions to this (relocation, increase in family size, etc.). You can refinance anytime out of an FHA loan however if you want to use an increase in value to drop the mortgage insurance (called MIP for FHA loans), you need to wait six months before using the new value. But beware, if you move out of the home then want to refinance, you will be paying higher rates as the home is now investment property. My best advice would be to refinance from FHA to conventional 1. while you are still living there, so the refinance will be owner occupied instead of investment and 2. once you have enough equity to qualify for conventional financing.
    Paul Hanley from Austin, TX
    Replied 6 months ago
    Good clarification here. Thanks Sean.
    Christopher Smith Real Estate Agent from Gulfport, MS
    Replied 6 months ago
    Thanks for clearing that up Sean! I was wondering just that
    Krystal Todd Accountant from Hollywood, Fl
    Replied 6 months ago
    Thank you for this post! I just got pre-approved for a FHA loan and I was contemplating which route I should take (FHA vs. Conventional). The worst part of the FHA is not being able to get out of the MIP even after having 20% equity. If the down payment is more than 5%, does that mean the MIP will fall off eventually?
    Sean Psaradelis
    Replied 6 months ago
    Krystal, it doesn’t matter how much down payment you make with an FHA loan, MIP will be required for the life of the loan. Now considering whether to go FHA vs. conventional, it depends on so many factors, including what kind of a home you are buying. Conventional financing requires more down payment on multi-family home purchases, whereas FHA will allow 3.5% down.
    Kent Nielson Contractor from Vancouver, WA
    Replied 6 months ago
    It’s been a while. but I’m pretty sure you can avoid the MIP if you put down a certain % on an FHA loan. I want to say 10% or 15%…hopefully a more educated lender can nail down the specifics.
    Josh Splawn from Oak View, California
    Replied 6 months ago
    Good questions Krystal. I would like to know as well, especially the part about not owning a home for 3 years. I have not heard anything like that in the past. P.S. I think you mean PMI when you said MIP.
    Peter Morrissey Rental Property Investor from Syracuse, NY
    Replied 6 months ago
    Yes, I would love some clarification on the rules around qualification and owning an existing home. I own a home that is paid for, but may want to move to a multifamily house hack due to kids growing up.
    Bridget Poston Rental Property Investor from Newport, OH
    Replied 6 months ago
    Andrew, Useful, straightforward post, especially for a newbie like me. My boyfriend and I are thinking of house-hacking within the next two years, ideally with an FHA loan in Ohio. It’ll be our first property. One question though, I know you said FHA requires 2 years of employment, but does your yearly income from that W2 job play a factor in determining whether or not you can obtain the loan? Like would someone who makes $50k a year have an advantage over someone who only makes $30k? Not sure if that matters. Thanks in advance for any input!
    Sean Psaradelis
    Replied 6 months ago
    Hi Bridget, just as long as you qualify for the loan with your income, the amount you make will not change your financing. You either qualify for the loan or you do not. Higher income has no advantages vs lower income that qualifies. Good luck on your house-hacking!!
    George Post from Boston
    Replied 6 months ago
    Great points! FHA has MIP(Mortgage Insurance Premium). One thing to consider with FHA is the up front MIP or UFMIP. (1.75% of base loan amount). For example, on a 300k purchase 3.5% down loan, you will be adding $5,066.25 to your total loan amount (1.75% of $289,500). Purchase $300,000 DP $10,500 Monthly MIP – $205.60 Base Loan Amount $289,500 UPMIP $5,066.25 So day one of your mortgage, your principal balance is $294,566.25, despite putting $10,500 (3.5%) down on a $300k purchase! You would think you would be at $289,500! And yes, you need to refi to remove FHA MIP. Hope this was helpful!
    Scott Freitag
    Replied 6 months ago
    Bridget, the answer is yes. One making 30k vs 50k could have an impact on the DTI. Alos, the other debts that one has will also impact the DTI
    Lauren Bellis Rental Property Investor from Boston, MA
    Replied 6 months ago
    Thanks so much for the post, very clear pro/con analysis of the basics of FHA loans! I am currently considering using an FHA loan to purchase my second property: a 2 family home I will owner occupy one unit and rent out the other unit. I have a condo I own with a conventional mortgage & in which have tenants living. One of the lenders I spoke with told me I cannot use the income from the condo for my DTI because the new 2 family home will be less than 100 miles from the rental condo. Another lender said it is okay of the 2 family is within 100 miles if I owner occupy one of the two units (which I will). Any insight on this? Thanks so much!
    Sean Psaradelis
    Replied 6 months ago
    Hi Lauren, Your first lender knows the changes that took place recently vs your second lender. Here is what FHA guidelines state: “If rental Income is being derived from the Property being vacated by the borrower, the borrower must be relocating to an area more than 100 miles from the Borrower’s current Principal Residence no matter what type of financing is on the departing residence. The Mortgagee must obtain a lease agreement of at least one-year’s duration after the Mortgage is closed and evidence of the payment of the security deposit or first month’s rent. If the Borrower has limited or no history of Rental Income for the Property since previous tax filing, including Property being vacated by the Borrower, the Mortgagee must obtain an appraisal evidencing market rent and that the Borrower has at least 25 percent equity in the Property.” Hope this helps!!
    Tramone Russell
    Replied 5 months ago
    Hello Sean I am having a really hard time understanding this definition, could you simplify it please? Thanks!
    Jason A. from New Haven, Connecticut
    Replied 6 months ago
    What I have learned : pre-pay PMI if you can! Usually break even within 5/ 6 years in many cases … so worth it in many cases.
    Khalil Bachir from Pompano Beach, FL
    Replied 6 months ago
    Thank you Andrew. Great read. I am trying to convince my nephew to purchase a fourplex and live in one unit as mentioned in your article. I think this is a great way to begin his real estate portfolio. Hopefully after he reads your post he will take action.
    Andrew Syrios Residential Real Estate Investor from Kansas City, Missouri
    Replied 6 months ago
    I agree Khalil, in fact I think it’s the BEST way to get started in real estate. Good luck convincing your nephew!
    Rachelle Bisaillon Property Manager from Winter Park, FL
    Replied 6 months ago
    I dont believe you can use an FHA loan to purchase a quadplex as of January or February of this year. I tried to do this in March and my lender double checked and said they had just changed this and I was unable to use this type of loan. Well let me clarify, you can use it if you purchase it as a single family but not if your intention is to use the income from the other three units to qualify for a higher loan amount.
    Susan Jackson
    Replied 6 months ago
    I just looked for any information to back this up. Would you (or anyone else) have any resources? All of the articles I found in the last three months all talk about it still being an option. Thanks!
    Christopher Smith Real Estate Agent from Gulfport, MS
    Replied 6 months ago
    Awesome read! I’m currently looking into an FHA myself for a duplex! Also, noticed you went to UofO for a bit? GO DUCKS!!
    Andrew Syrios Residential Real Estate Investor from Kansas City, Missouri
    Replied 6 months ago
    Thanks Christopher and good luck! Yeah, I graduated from the UO in 2006. When did you go?
    Tom J. from Littleton, CO
    Replied 6 months ago
    Something I’ve wondered about these loans for a while. I have 7 figures in assets (not real estate), but optimize my income through contributions to solo 401k and other retirement accounts such that my taxable income comes in below 20K each year. Would I be able to qualify for an FHA loan to purchase a 4 plex? I’ve always assumed I would not qualify due to income requirements on these types of loans. Thanks for any insights.