Homebuyers

FHA Myths Debunked: What Every Homebuyer Should Know About These Popular Mortgages

If you’re exploring options for buying a home, you may have come across Federal Housing Administration (FHA) loans.

These government-backed loans are popular thanks to their low down payments, which can be as little as 3.5%, and more flexible credit requirements compared to other types of mortgages. This may help buyers become homeowners, even if they only have modest savings or less-than-perfect credit. 

However, misconceptions about who can use FHA loans, what they cost, and how they work can discourage buyers from considering them. This is where understanding both the advantages and trade-offs becomes key.

"FHA loans often offer lower down payments and competitive [mortgage] rates,” said Mike Schmidt, a lawyer for Schmidt & Clark LLP in Phoenix, Ariz. “Compared to personal loans or credit cards, FHA loans are less expensive. But they’re slower [to receive] and involve stricter guidelines.”

However, buyers who don’t put down 20% will be on the hook for paying monthly mortgage insurance premiums “which can be costly,” said Schmidt.

To help you navigate the facts and fiction, let’s break down some of the most common myths surrounding FHA loans—and the truths you need to know.

Myth #1: FHA loans are only for first-time buyers

One of the most common misconceptions is that FHA loans are only for first-time buyers.

About 82% of the buyers who used these loans in 2023 were purchasing their first homes, according the FHA’s Annual Report. But anyone can apply for these mortgages, regardless of how many homes they’ve owned before.

The flexibility they offer may make FHA loans a good option for those upgrading to a larger home, downsizing, or reentering the market after selling a previous property.

“As long as you qualify and meet the county loan limits, you can take advantage of an FHA loan,” said Dianne Steffey, a loan officer for New American Funding based in San Antonio, TX.

Myth #2: FHA loans require high credit scores

Another common misperception about FHA loans is that they only for borrowers with spotless credit. In reality, FHA loans are specifically designed to help buyers with lower credit scores, limited credit history, and more debt.

“FHA allows debt-to-income ratios up to 57%, which makes it easier for buyers to qualify,” said Steffey. This higher threshold can be a lifeline for buyers who might not qualify for a Conventional loan.

Schmidt adds that FHA loans can also work well for buyers who have solid financial habits but may not have a large down payment saved up.

“These loans are particularly helpful for buyers with small down payments or those working to improve their credit,” said Schmidt.

Myth #3: FHA loans are only for low-income buyers

Some people assume FHA loans are only for low-income buyers, but these mortgages are open to anyone who qualifies for them.

“There’s no income cap for FHA loans,” said Steffey.

Even buyers looking at higher-priced homes may benefit from using an FHA loan, as long as the loan amount stays within the county limits.

Myth #4: FHA loans have tougher appraisal requirements

One of the most persistent myths is that FHA loans require stricter appraisals and home inspections compared to Conventional loans.

While FHA loans do have specific appraisal guidelines, the process isn’t as strict as many people think.

Lenders will generally require any big safety problems in a home to be addressed before approving a mortgage, regardless of the loan type.

“No matter what type of loan it is, the process is essentially the same,” said Steffey.

Dianne Ayala Steffey NMLS # 267658