Types of FHA Loans

While many people think of FHA loans as a single program, there are actually several types of FHA loans designed to support different homeownership goals. Whether you’re buying your first home, renovating a fixer-upper, refinancing your current mortgage or even building a home from the ground up, there may be an FHA option that fits your needs.

In this guide, we’ll walk through the different types of FHA loans and help you understand which option might make the most sense for your goals.

What Is an FHA Loan?

An FHA loan is a mortgage insured by the Federal Housing Administration (FHA). That means the government backs the loan, reducing risk for lenders and making it easier for more borrowers to qualify.

It’s important to note that FHA loans aren’t issued by the government itself. Instead, they’re offered through approved lenders, while the FHA provides insurance on the loan.

Because of this added protection for lenders, FHA loans often come with benefits like:

• Lower down payment options (as little as 3.5% for qualified buyers)

• More flexible credit requirements

• Competitive interest rates

While FHA loans have specific guidelines and requirements, they can be a helpful pathway to homeownership for many borrowers. And depending on your situation, one of several FHA loan types may be the right fit.

Most Common FHA Loan Types

One of the biggest advantages of FHA financing is its flexibility. The program includes several different types of FHA loans designed to support buyers and homeowners at various stages of their homeownership journey.

Some options help buyers purchase a home, while others allow current homeowners to refinance or improve their property. Here are the most common types of FHA loans available today:

FHA Purchase Loan

The FHA Purchase Loan is the most widely used of all FHA loan types. It’s designed to help buyers purchase a primary residence, often with more flexible qualification requirements than many conventional loans.

One of the biggest benefits is the lower down payment option. Qualified borrowers may be able to purchase a home with as little as 3.5% down, which can make homeownership more achievable for buyers who haven’t had years to save.

FHA purchase loans can be especially helpful for:

• First-time homebuyers

• Buyers with limited savings for a down payment

• Borrowers with moderate or lower credit scores

While FHA loans are often associated with first-time buyers, you don’t actually have to be a first-time homeowner to qualify. Anyone who meets the guidelines and plans to use the home as their primary residence may be eligible.

Because of their accessibility, FHA purchase loans remain one of the most popular financing options for buyers entering the housing market.

FHA 203(k) Renovation Loan

If you’ve fallen in love with a home that needs a little work, an FHA 203(k) Renovation Loan may be worth exploring. This loan program allows borrowers to combine the cost of purchasing a home with the cost of renovations into one mortgage. Instead of taking out separate loans for the property and repairs, everything is wrapped into a single FHA loan.

This can be a helpful option for buyers considering fixer-uppers or homes that need improvements before moving in.

There are two main versions of the 203(k): the Limited 203(k) and the Standard 2023(k). The Limited 203(k) loan is designed for smaller renovations and repairs, such as replacing flooring, updating appliances or making minor improvements. The Standard 203(k) is used for larger renovation projects that may involve structural repairs or significant remodeling.

While renovation loans may sound complicated, many buyers find the process manageable when working with experienced lenders and contractors. For the right property, a 203(k) loan can open the door to homes that might otherwise be out of reach.

Note: Neighbors Bank does not currently offer this loan type.

FHA Streamline Refinance

Homeowners who already have an FHA loan may be able to refinance through the FHA Streamline Refinance program. This option is designed to simplify the refinancing process by reducing paperwork and documentation requirements compared to a traditional refinance.

In many cases, the FHA Streamline Refinance requires less income documentation than traditional loans, and it may not require a new appraisal. This means the loan can be processed faster than a standard refinance.

The primary goal of this program is to help homeowners lower their interest rate or monthly mortgage payment. Because the process is designed to be simpler, it’s often one of the most convenient FHA loan types for borrowers who already have FHA financing and want to improve their mortgage terms.

FHA Cash-Out Refinance

Another option for existing homeowners is the FHA Cash-Out Refinance. This loan allows homeowners to refinance their current mortgage and borrow against the equity they’ve built in their home.

Equity is the difference between your home’s current value and the remaining balance on your mortgage. As you make payments and your home potentially increases in value, your equity grows. With a cash-out refinance, homeowners can access a portion of that equity as cash.

Some common uses for these funds include:

• Home renovations or improvements

• Consolidating higher-interest debt

• Paying for major expenses such as education or medical bills

While this can be a helpful financial tool, it’s important to approach cash-out refinancing thoughtfully. Borrowing against home equity means increasing the size of your mortgage, so it’s best used for situations that support long-term financial goals.

Among the different types of FHA loans, the cash-out refinance is designed specifically for homeowners who want to tap into their property’s value.

FHA Construction Loan

While most buyers use FHA financing to purchase an existing home, there are also FHA loan types designed for building a new one. An FHA Construction Loan allows borrowers to finance the construction of a home rather than purchasing a property that already exists. This option can be particularly appealing for buyers who want to customize their home or build in a location where inventory is limited.

Construction loans can be more complex than standard purchase loans because they involve additional steps, such as:

• Construction plans and timelines

• Builder approvals

• Inspections during the building process

However, some lenders offer construction-to-permanent loans (like Neighbors Bank), which allow the construction financing to convert into a traditional mortgage once the home is completed.

While this program is less common than other types of FHA loans, it can be a valuable solution for borrowers ready to build their dream home.

Note: Neighbors Bank does not currently offer this loan type.

FHA Energy Efficient Mortgage (EEM)

For buyers and homeowners interested in improving a home’s energy efficiency, the FHA Energy Efficient Mortgage (EEM) may be worth considering. This program allows borrowers to finance energy-efficient upgrades as part of their FHA mortgage.

Examples of eligible improvements may include:

• Solar panels

• Insulation upgrades

• Energy-efficient windows

• HVAC system improvements

The idea behind the program is simple: energy-efficient upgrades may increase upfront costs, but they can also lead to long-term savings through lower utility bills. By allowing these improvements to be financed within the mortgage, the EEM program makes it easier for homeowners to invest in upgrades that reduce energy consumption and improve comfort.

Note: Neighbors Bank does not currently offer this loan type.

How to Choose the Right FHA Loan for You

With several types of FHA loans available, the best option often depends on your current situation and homeownership goals.

Here are a few questions to help guide your decision:

Are you buying a home or refinancing your current mortgage?
Buyers may look at FHA purchase loans or renovation loans, while homeowners may explore refinancing options.

Is the home move-in ready, or does it need repairs?
If you’re considering a property that needs updates, a 203(k) renovation loan may be worth exploring.

Do you want to access equity in your home?
A cash-out refinance could provide funds for major expenses or home improvements.

Are you building a home from the ground up?
An FHA construction loan may offer a pathway to financing your build.

Choosing between the different types of FHA loans doesn’t have to be overwhelming. Each program is designed to meet specific needs, and understanding your goals is often the first step toward finding the right solution.

If you’re unsure which option may work best for you, a Neighbors Bank loan expert can help walk through your goals and recommend the right path forward. Get started.