Busting Myths About FHA Loans in California

If you’re thinking of buying a home in California, you may wonder if an FHA loan could be a good option for you. An FHA loan can make it possible to buy a home with a smaller down payment or by using down payment assistance programs available in the state of California. 

But there are a lot of myths about FHA loans in California, so today we’re myth-busting and setting the record straight.

What Is an FHA Loan?

Before we talk about some common myths about FHA loans, let’s clarify exactly what an FHA loan is. FHA stands for Federal Housing Administration, which means it’s a federal government program—specifically, it guarantees loans that are made by lenders.

The confusing part is that the FHA is a federal agency. Each state and then even some communities have additional programs that are designed to help borrowers get an FHA loan. These programs vary by location, so you might have to research find which California FHA assistance programs can help you. If you have any questions about what’s available to help you buy a home, we’re here to help!

The purpose of FHA loans is to assist people with low to moderate incomes purchase homes. It’s not uncommon for people with lower incomes to have lower credit scores and have difficulty saving up a down payment. For this reason, an FHA loan can make a huge difference for some borrowers!

Let’s look at some current myths about FHA loans in California.

Myth: An FHA loan means the government is lending you money for your mortgage.

Fact: An FHA loan is a mortgage that’s issued by a lender the FHA has approved—not the FHA or the government itself. You’re still borrowing money from a lender, just as you would with any other home purchase. The FHA is guaranteeing the loan, protecting lenders from the risk of lending to people with lower income, down payments, or credit.

Myth: FHA loans have higher interest rates.

Fact: Interest rates for mortgages are always fluctuating, whether it’s a conventional loan or an FHA loan. The good news is they tend to run at roughly the same rate, with just small differences between them. 

Interest rates on mortgages are based on risk-based pricing. This means if the mortgage company thinks you’re a risk to lend to, then you’ll be paying more in interest. This is because the bank feels your credit history leaves them open to some risk. Namely, that you won’t pay your mortgage and will default on the loan. They want a little more interest from you to make their decision to lend to you more appealing.

The good news is that with the government backing your FHA loan, a lot of that risk goes away for the lender. This will leave you with a better interest rate than you might be able to get otherwise.

Myth: FHA loans are only for people with low credit scores.

Fact: FHA loans are designed to help people with lower credit scores get mortgages BUT they’re not exclusively for people with low credit scores. The current guidelines say you need a credit score of at least 580 to get an FHA loan. That means your credit score can be higher and you can still get the loan. Statistics from 2018 show that the average credit score for all FHA loans was between 600 and 700. With 35% of the borrowers having scores of 700 or greater and only 7.34% have scores below 600.

Also, it’s important to note that if your score isn’t quite at 580 but is between 500 and 579, there are additional programs that can help you qualify for an FHA loan. You also might be able to qualify if you can put up a 10% down payment, for instance. So, FHA loans can help people with low credit scores but they’re also available for people with great credit. 

Myth: You need a big down payment to get an FHA loan.

Fact: If you read the fact above, that 10% down payment probably jumped off the page at you. This amount is just for people who have a credit score in the 500 to 579 range. They might even be able to get outside assistance to drop that amount.

If you have a higher credit score, 580 or above, the down payment you’ll need is significantly less at 3.5%.  If you are not able to come up with a 3.5% down payment, you might be able to find a program that can help you. In California, those programs are CalPlus, CalHFA, CalPlatinum/GSF Platinum, and CHDAP. These programs can help you reduce the down-payment, sometimes down to 0.5%.

Myth: FHA loans are only for first-time homebuyers.

Fact: This might be the most common FHA loan myth. FHA loans are often marketed as an option for first-time homebuyers. This is because once you own a home, you typically have some equity in it when you’re ready to buy another. The problem is that the housing boom and crash left a lot of people without a home and any equity. This makes those homeowners ideal candidates for an FHA loan, even though they’ve already owned a home.

The only related requirement is that the FHA will only insure mortgages for people who use the home as a primary residence. That means no vacation homes or second homes are allowed.

Myth: You can use FHA loans on a single-family residence only—no duplexes or condos.

Fact: You can purchase many different types of homes with an FHA loan; single-family, condos, manufactured homes, and some multi-family homes are eligible. However, no matter which type of home it is, it will have to meet FHA minimum property requirements. This is to ensure the home meets basic safety and livability standards. We can help you determine if your property qualifies for an FHA loan. We hope this helps clear up some myths about FHA loans in California! If you’re interested in starting the application process for any type of loan, give us a call or send us a text at (916) 465-6639 or go to our application page. We’re here to go through all of the options with you.