This article is part of an ongoing series that answers common questions about different types of mortgage loans. In previous articles, we have focused on California VA loans and also the so-called jumbo mortgage products for high-end purchases. Today, we’ll answer some of the most frequently asked questions about California FHA loans.

1. What is an FHA home loan, exactly?

An “FHA loan” is simply a mortgage loan that gets insured by the government, through the Federal Housing Administration. This is one of several government-backed mortgage programs available in California, along with VA and USDA home loans. This insurance gives the lender some degree of protection against default.

In your research, you might also encounter the term “conventional loan.” This label is used to distinguish a regular mortgage product from the government-backed programs mentioned above. A California FHA loan is insured by the government, while a conventional mortgage is not. That’s the key distinction you should know about.

2. How does the process work?

As mentioned above, a California FHA loan receives insurance backing from the federal government. The loan itself is originated by a bank or mortgage company within the private sector. In order to participate in this program, a mortgage company must be approved by the Federal Housing Administration, which is part of the Department of Housing and Urban Development.

As of borrower, you would apply for a California FHA loan through an approved mortgage company. You can get pre-approved for a certain loan amount to start the house-hunting process. You would then make an offer to buy a house and go back to the lender with your purchase agreement. You’ll go through the underwriting process and  eventually reach your closing date.

So in many respects, the process for using a California FHA loan is the same as any other type of mortgage. The difference is that the home loan is insured via the federal government.

3. What are the requirements for a California FHA loan?

The minimum requirements for this program are established by the Department of Housing and Urban Development (HUD).

According to official HUD guidelines, borrowers seeking an FHA loan in California or elsewhere must have a credit score of at least 500. To use the 3.5% down payment option, you’ll need a credit score of 580 or higher.

Borrowers must make a down payment of at least 3.5% of the purchase price or appraised home value. You also need to have a manageable level of debt, relative to your monthly income. Those are the primary requirements for a California FHA loan.

4. Who is eligible for the FHA mortgage program?

There’s a widespread misconception that the FHA program is limited to first-time home buyers. But that’s not true. This program is open to anyone who meets the basic eligibility requirements mentioned above. Both first-time and repeat buyers can qualify for an FHA loan in California. Even non-U.S. citizens can apply.

5. Do I have to make a down payment?

Yes, California FHA home loans typically require a down payment of at least 3.5%. That’s one of the benefits of this particular program. Some mortgage options require a larger upfront investment from borrowers. But the FHA program allows you to put down as little as 3.5% of the purchase price.

As mentioned earlier, you will need a credit score of at least 580 to qualify for the 3.5% down payment option on a California FHA loan.

You could also obtain down-payment funds from an approved third-party donor, such as a family member. These “down payment gifts,” as they are known, can help ease one of the biggest hurdles associated with a home purchase.

6. What are the pros and cons of a California FHA loan?

We’ve covered one of the primary advantages of a California FHA home loan already. As a buyer, you could make a down payment as low as 3.5%.

Additionally, this program has relatively flexible qualification criteria for borrowers, when compared to regular or conventional mortgages. This has to do with the government insurance backing mentioned earlier. Mortgage lenders who offer California FHA loans received additional protection in the form of government insurance. This benefits borrowers in the form of relatively lenient qualification criteria.

The primary downside associated with a California FHA loan is that you have to pay for mortgage insurance. Most borrowers who use this program to buy a house have to pay both an upfront and annual mortgage insurance premium. This government-required insurance offsets the risks associated with a low down payment.

(FYI: mortgage insurance is also required on conventional mortgage products when the loan-to-value ratio rises above 80%. This means that if you make a smaller down payment, you will probably encounter mortgage insurance — regardless of the loan type.)

7. How much can I borrow with a California FHA loan?

There are two factors that will determine how much you can borrow, when using a California FHA loan:

The first factor is your income and debt situation. The Federal Housing Administration limits borrowers to having a certain debt-to-income ratio. The DTI limit for California FHA home loans is typically set around 43%. But it can rise as high as 50% for certain borrowers with compensating factors.

There are also government-imposed size limits for California FHA loans. These limits are established by the Department of Housing and Urban Development. They vary by county because they are based on home prices.

In California, the 2021 FHA loan limits range from $356,362 up to $822,375. More expensive counties have higher limits, while areas with lower median home prices have lower FHA loan limits. You should also know that these limits can change from one year to the next, due to rising housing costs.

8. What kind of house can I buy?

Any home being purchased with a California FHA loan must meet the minimum property requirements imposed by HUD. Most of these requirements have to do with the health and safety of the occupant. For example, designated bedrooms must have at least one window or some other secondary egress, for fire-safety purposes. The home must generally be livable as well.

With that being said, you can use a California FHA loan to purchase a wide variety of property types. This includes a regular detached home, a condominium, a townhome, a mobile home, etc.

Also, there’s another program designed for “fixer-upper” properties. The FHA 203k rehab program allows you to purchase and renovate a home with a single loan.

9. Do FHA loans have higher mortgage rates?

The mortgage rate assigned to a particular home loan has more to do with the borrower than the type of loan program being used. For instance, borrowers with higher credit scores and other positive factors tend to qualify for lower mortgage rates, compared to “higher risk” borrowers.

The mortgage rate you receive on a California FHA loan will be determined by a number of factors, such as your credit score, the down payment amount, whether you use a fixed or adjustable loan, etc.

10. How do I apply for a California FHA loan?

Applying for an FHA loan in California works the same way as any other type of mortgage program.

You would start by submitting a standard loan application form. You’ll need to supply some additional documents as well, including bank statements, tax forms, pay stubs and the like. You can get pre-approved for a specific mortgage amount, which makes the house-hunting process a lot for efficient.