What Type of Home Can I Buy With an FHA Loan?

If you want to buy a home, but you have limited savings or a lower credit score, you may be interested in what an FHA loan has to offer. The Federal Housing Administration, a division of the US Department of Housing and Urban Development (HUD), insures FHA home loans for first-time buyers and those with less-than-ideal finances. These loans require a minimum down payment of just 3.5% and a credit score of only 580. You may even qualify if your score is as low as 500, provided that you put down at least 10%. 

You may have heard that FHA mortgage requirements are more stringent than conventional loans, but it may surprise you to learn just how flexible your housing options are. Here’s a closer look at the types of homes you can buy with an FHA loan and what could prevent a home from being FHA-approved. 

Types of Homes that Qualify for FHA Loans 

You can use an FHA mortgage to buy a variety of property types. While single-family homes are the most common, they are far from your only option. Here are the other types of homes that are eligible for FHA loans. 

Manufactured Homes 

A manufactured home is a factory-built home that arrives onsite fully constructed and ready to be installed. The house is only meant to be moved once, which differs from a mobile home that can be relocated multiple times if necessary. 

FHA manufactured home loans may require a slightly higher credit score than other FHA-approved properties. Eligible homes must be built on or after June 15, 1976, and meet local and state guidelines. Minimum square footage requirements may also apply, and the home must be installed on a permanent foundation. 

Fixer-Uppers 

Failure to meet minimum property standards could disqualify a fixer-upper from an ordinary FHA loan. However, if the home you want to buy needs major renovations, you can apply for an FHA 203(k) rehabilitation mortgage. Be aware that the house must still meet basic structural and energy efficiency standards to qualify. 

An FHA 203(k) loan allows you to buy and renovate the home you want. It’s also available as a refinance loan for the home you currently live in. Once you have completed the necessary repairs, an appraiser will reassess the home’s suitability to make sure it meets the minimum property standards. 

Mixed-Use Properties 

While you can’t buy an investment property with an FHA loan, a mixed-use property may be eligible as long as it’s primarily zoned residential and you intend to use at least 51% of it as your primary residence. The remainder of the property can be used for other purposes, such as renting it out to generate extra income. 

Multifamily Housing  

Certain duplexes and condominium buildings with up to four units are eligible for FHA loans. Check HUD’s list of approved projects to see if the property you want to buy has met the FHA’s minimum property eligibility requirements. 

Purchasing a condo building is your chance to make extra money by renting out part of the property. Just be aware that you need to live in one of the units you purchase for the building to be FHA-approved. Other unique requirements also apply to FHA condo loans. 

A Second Home 

FHA loans are often thought of as first-time homebuyer loans, but you may be eligible to buy a second FHA-insured home under the right circumstances. The qualifications, outlined in HUD 4000.1, include the following: 

• Your job requires you to relocate. 
• The property no longer meets your family’s needs. 
• The loan-to-value ratio on your current home is 75% or less. 
• You co-signed an FHA loan for a home you don’t live in. 
• You got divorced and no longer live in the FHA-insured home. 

Why a Home Might Not be FHA-Approved 

While there is more leniency with FHA loans than you might have realized, certain restrictions still apply. Here are the most common scenarios that disqualify a home for an FHA loan. 

Vacation Homes and Investment Properties 

You can only use an FHA loan to buy a home you plan to use as your primary residence because the FHA program is intended to encourage primary homeownership. If you want to purchase a vacation home or investment property, you’ll need to check out other types of home loans. 

Tiny Homes 

The affordability and portability of tiny homes make them a growing trend around the country. Unfortunately, properties are only eligible for an FHA loan if they are affixed to a permanent foundation. This is a condition of the loan because homes on wheels aren’t classified as real estate, and all properties purchased with an FHA loan must be classified as such. 

Failure to Meet FHA Minimum Property Standards 

FHA loans have extra safety, security, and soundness requirements, which could prevent you from purchasing the home you want. This protects the lender if the borrower defaults on the loan, and the home goes into foreclosure. It also protects the borrower from unforeseen home repair bills and maintenance costs. 

FHA inspections tend to disqualify homes that aren’t in prime condition because they have higher standards than typical home inspections. The qualification guidelines change regularly, so ask an inspector for more information before assuming the home you want to buy is FHA-approved.