FHA loans are in demand again a decade-plus years after the Great Recession.  With its low down-payment and credit score requirements, Federal Housing Administration (FHA) loans are the way that low-income Americans can buy homes.

According to a HodPads report, it will take about 6 ½  years to save for a 20% mortgage down payment on the median-priced home ($282,000) in America.  Potential homebuyers can get FHA loans with a down payment of as little as 3.5 percent. 

How Do FHA Loans Work?

Homebuyers cannot apply for FHA loans directly through the Federal government.  Banks and non-bank lenders underwrite FHA loans, and the government promises to pay them if the borrower defaults on the loan. 

The appeal of FHA loans, mostly among millennials, makes FHA lending an attractive business unit to brick-and-mortar banks, FinTech, and non-bank firms. 

The Department of Housing and Urban Development (HUD) runs the FHA loans.  HUD has on its website the criteria that firms have to meet to become FHA-approved lenders.  However, fees, rates and terms, and other costs can vary amongst FHA lenders.  

You can’t buy a million-dollar home via the FHA program. If you are thinking about applying for an FHA loan, you can check the loan limits in your area here.  Below are the five best FHA lenders in 2020:

Quicken Loans

Quicken Loans utilizes technology effectively to facilitate its FHA application process.  You can apply via its App or on the phone. They have great customer support that can walk you through the process and answer all your questions

• FICO® score:   580
• down payment: 3.5%
• Debt-to-Income Ratio:  50% or below
• Upfront mortgage insurance premium (UFMIP): 1.75% of the loan amount
• Customer Support: Good
• Closing Costs/Points:  From 2% – 6% of the purchase price.

New American Funding

New American Funding has gifts or grants allowed toward down payment.  Their representatives will walk you through the process from start-to-finish.

• FICO® score:   580
• Down payment: 3.55%
• Debt-to-Income Ratio: 43% or below
• Upfront mortgage insurance premium (UFMIP): 1.75% of the loan amount
• Customer Support: Good
• Closing Costs/Points: Between 2 and 5% of the purchased price

Navy Federal Credit Union

Navy Federal Credit Union has nearly 9 million active members. Its dedication to the military community is excellent.  If you are part of the military community and looking into an FHA loan, the Navy Federal Credit Union has to be your first call. 

• FICO® score:   580
• Down payment: 3.55%
• Debt-to-Income Ratio: 45% or below
• Upfront mortgage insurance premium (UFMIP): 1.75% of the loan amount
• Customer Support: Great
• Closing Costs/Points: Up to 3% of the purchased price

Bank of America

Bank of America has two types of mortgages that are available to low-income Americans:  The Affordable Loan Solution Mortgage offers a 3% down payment with no mortgage insurance required.  The Freddie Mac Home Possible mortgage also provides a 3% down payment, but it requires private mortgage insurance.  The Bank of America’s affordable mortgages are not FHA loans, so they have an upfront mortgage insurance premium (UMIP)

• FICO® score:  600   
• Down payment: 3.5%
• Debt-to-Income Ratio: 36% or below
• Annual Mortgage Insurance Premium: 0%*
• Customer Support: Good
• Closing Costs/Points:  Up to 3% of the purchased price

Citi Mortgage

CitiMortgage is best known for conventional and jumbo loans, but the company also underwrites FHA loans.  They provide both digital and face-to-face support to potential homebuyers.

• FICO® score:  580   
• Down payment: 3.5%
• Debt-to-Income Ratio: Between 36% and 43%
• Upfront mortgage insurance premium (UFMIP): 1.75% of the loan amount
• Customer Support: Good
• Closing Costs/Points:  Up to 3% of the purchased price

The Bottom Line

A Federal Housing Administration loan is an affordable way to become a homeowner, but the product can be expensive.  For example, the mortgage insurance premium (MIP) can be as high as 1.75% of the purchased price annually.  

So, if you financed a 300k home, the MIP could cost as much as $5,250 ($300,000 x 1.75%).  Sellers and lenders may pay some of your closing costs.

The housing crisis a decade ago revealed lots of shady activities by brick-and-mortar banks and non-bank firms.  The government introduced new guidelines for lenders to follow, but homebuyers need to shop around and do their due diligence before choosing a lender.