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Mortgage

The Different Types of FHA Loans

Emily Starbuck Gerson
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Quick Answer

The government offers a vast amount of money-saving programs and loans to prospective homebuyers. Here are five common types of FHA loans:

  1. Basic Home Mortgage 203(b)
  2. FHA's Energy Efficient Mortgage
  3. 203(k) Rehab Mortgage
  4. Mortgage Insurance for Disaster Victims Section 203(h)
  5. Good Neighbor Next Door
<p> The way you invest will likely change as you age. You may be comfortable exposing yourself to more risk when you’re younger and have more time to ride out bouts of <a href=market volatility. When you’re heading into your golden years, you might prefer a more conservative asset allocation. Your risk tolerance and financial goals will likely guide your investing strategy as well.

A recent survey from the Employee Benefit Research Institute asked current retirees what financial advice they’d give their younger selves. About 70% answered with saving or investing more—and earlier. Here’s how to invest based on your current age.

Best Ways to Invest in Your 20s

Retirement probably isn’t top of mind for most 20-somethings, but getting an early start allows you to save more over the long haul. If you invested $300 per month beginning at age 25, you’d have over $792,000 by the time you turned 65, assuming a 7% average annualized return. By comparison, starting at age 40 would return about 30% less—cutting you off from roughly $547,598.

In terms of your investments, you might want to set your sights on growth assets. These are stocks that are expected to gain value in the future. With this investment strategy, you’re betting that a stock’s strong past performance indicates that it will continue increasing in value. Growth investing is considered risky, but younger investors have time on their side. They can afford to assume more investment risk because they have more time to recover from market downturns.

The Big Picture

Instead of contributing a set dollar amount, another guideline is to earmark 15% of your income for retirement when you’re in your 20s. Building your financial foundation is important too. That includes:

Best Ways to Invest in Your 30s

While your 20s are all about learning the financial ropes, your 30s may be a time where you’re more focused on career growth and increasing your income. Continuing to invest is just as important. According to 401(k) plan administrator Vanguard, the average 401(k) balance for 25- to 34-year-olds was $37,211 in 2021. If you’re late to the game, don’t stress. The best time to begin is always today.

Your asset allocation, which refers to the actual investments in your portfolio, will likely mirror the recommended approach for 20-somethings—higher on risk and growth assets. T. Rowe Price suggests an allocation of 90% to 100% stocks, with bonds making up the remainder. If you choose to dabble in these investments, diversifying your portfolio can help insulate you from potential losses.

The Big Picture

By age 30, having the equivalent of your current annual salary saved is ideal. Aiming to invest 15% of your income is a common benchmark, but start where you are. You could always begin with, say, 10% and ratchet up your savings rate annually.

Eliminating debt can help you get there. Paying off accounts frees up money you were previously putting toward monthly payments. Continuing to strengthen your emergency fund is just as important. Experts recommended having three to six months’ worth of expenses on hand.

Best Ways to Invest in Your 40s

Turning 40 marks a transition when it comes to investing and retirement saving. If you’re hoping to retire in your 60s, that means you’re only two decades away from leaving the workforce. Investing 20% of your income is the rule of thumb in your 40s and beyond. The big goal is to have three times your annual salary saved by age 40.

Your asset allocation may begin pulling away from high-risk investments in favor of safer securities. This can include bonds, certificates of deposit (CDs) and money market accounts. PNC Financial Services suggests an asset allocation of 60% to 70% stocks and 30% to 40% bonds.

The Big Picture

If you’re able, maxing out your retirement accounts can help supercharge your nest egg. In 2023, you can contribute up to $22,500 to a 401(k) and $6,500 across all individual retirement accounts (IRAs).

Contributing to a health savings account (HSA) is another way to prepare for the future. The money you put in is tax-deductible, which reduces your taxable income today. Withdrawals aren’t taxed either, as long as the money is used to cover qualified medical expenses. Once you turn 65, you can use HSA funds for anything you want. In this way, it can help supplement retirement income. Just bear in mind that the IRS considers non-qualified distributions taxable income.

Best Ways to Invest in Your 50s

You’re getting closer to the home stretch now. According to the Center for Retirement Research at Boston College, the average retirement age in 2021 was about 65 for men and 62 for women. The goal at age 50 is to have six times your annual salary saved.

Your investment strategy will likely skew more conservative with each passing decade. That’s because your window to rebound from market volatility is getting narrower. In your 50s and 60s, PNC Financial Services suggests an asset allocation of 50% to 60% stocks and 40% to 50% bonds.

The Big Picture

Now is a good time to check in on your retirement goals. Some questions to ask yourself may include:

  • What do you want life to look like when you’re no longer working?
  • Roughly how much money do you think you’ll need per year to live comfortably?
  • What will your health care expenses be like when you leave the workforce?

If your current savings rate doesn’t support your retirement goals, you might consider working with a financial advisor. They can evaluate your income, assets, debts and goals, then help you come up with an investing strategy. That might include making catch-up retirement contributions. (Folks who are 50 and older are allowed to contribute more to tax-advantaged retirement accounts.)

Best Ways to Invest in Your 60s

According to one T. Rowe Price analysis, you should ideally have 11 times your ending salary saved by the time you retire. As you enter your 60s, take your financial temperature. Catch-up retirement contributions can continue to be useful if you’re behind. You might also consider downsizing your lifestyle a bit in order to save more for retirement. That could mean selling your home and opting for a smaller house.

When it comes to your asset allocation, risk probably isn’t your friend at this stage of life. A conservative allocation may feel more comfortable. That might be 50% stocks, 50% bonds. A financial professional can prove useful here.

The Big Picture

As you move closer to retiring, you may want to think about your retirement income sources. This can include:

Certain accounts are taxed differently than others. Distributions from 401(k)s and traditional IRAs, for example, count as taxable income. Withdrawals from Roth accounts are tax-free. You’ll want to be strategic and pull funds in the most tax-efficient way possible. Otherwise, you could encounter unexpected tax bills that deplete your nest egg.

Best Ways to Invest in Your 70s and Beyond

There’s a common misconception that retiring means that you stop investing. With the cost of consumer goods being what they are, it’s important to stay invested during retirement. Inflation chips away at your purchasing power, which means your nest egg could be worth less 10 years from now than it’s worth today. Continuing to invest in your 70s and beyond can help shield you from the effects of inflation.

Assuming lots of risk in your investment portfolio probably isn’t wise. T. Rowe Price suggests holding up to 20% cash, 40% to 60% bonds and 30% to 50% stocks. Of course, the right allocation for you will depend on your goals, risk tolerance and financial situation.

The Big Picture

If you have money in tax-advantaged retirement accounts, such as a 401(k) or traditional IRA, you must begin taking required minimum distributions (RMDs) at age 72. Remember that these are taxable withdrawals. The amount you take could push you into a higher tax bracket. One potential workaround is to take your RMD amount from these accounts, then draw the rest of your income from non-taxable sources—like Roth accounts, Social Security and annuities. It’s a balancing act. A financial advisor can help.

Rebalancing your portfolio throughout retirement is important too. If left unchecked, your investments could drift into riskier territory. Rebalancing involves resetting your portfolio back to your desired asset allocation.

The Bottom Line

The way you invest in your 20s will probably be very different from how you invest in your 50s (and beyond). What we’re getting at is that your investment strategy will likely change as you age—and that’s a good thing. It allows you to recalibrate and adjust your approach based on your goals and time horizon.

Experian provides free financial resources before and during retirement. That includes the ability to check your credit score and credit report, anytime you want. Keeping up with your credit health is important no matter how old you are.

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Homebuying is an expensive endeavor, but still very much a part of the American dream. To make it more accessible, the Federal Housing Administration (FHA)—part of the U.S. Department of Housing and Urban Development—insures certain types of loans.

FHA loans aren't given out by the government; instead, borrowers apply for FHA loans at participating lenders, such as banks. The lenders fund the loan, which is insured by the government to reduce risk and allow lenders to offer better terms to eligible borrowers.

FHA loans are popular for first-time buyers due to low down payment requirements, less stringent borrowing criteria and potentially better interest rates than conventional loans. On the flip side, they can have significant limits, restrictions and fees.

While the phrase "FHA loan" is often used to describe a single type of mortgage, the FHA actually offers a variety of loan products and programs. This includes everything from loans that bundle rehabilitation or energy-improving expenses into a mortgage to loans for specific populations such as Native Americans and Native Hawaiians. Here are five of the most common FHA loans available, though this list is not exhaustive.

1. Basic Home Mortgage 203(b)

What is it? This type of loan is the most popular and traditional mortgage the FHA offers. The rest of the loans mentioned in this article are still FHA loans, but this type of loan is usually what people mean when they say "FHA loan." It's ideal for first-time homebuyers because its down payment requirements are as low as 3.5%, and its interest rates and credit criteria may be lower than with conventional mortgages.

Key requirements: These loans are for a principal residence only, though they can be used for one- to four-unit structures. The amount you can borrow with a 203(b) mortgage depends on your location; you can look up FHA mortgage limits in your area. The home must pass strict HUD appraisal standards, and homeowners must pay mandatory mortgage insurance unless they can provide a down payment of 10% or more.

2. FHA's Energy Efficient Mortgage

What is it? This mortgage helps homebuyers (or those wanting to refinance) make their home more energy-efficient, which lowers utility bills. The FHA's Energy Efficient Mortgage program gives borrowers more than what's needed to purchase a home, with the remaining amount used for updates. The homebuyer only has to qualify for enough to buy the home—not the additional "energy package." Eligible expenses include energy-saving equipment and wind or solar energy technologies.

Key requirements: There are limits to how much extra you can borrow for the energy-efficient improvements, which are dependent on several factors specific to your situation. You must have a qualified home energy rater or assessor identify what measures should be added, and any improvements must be considered cost-effective.

3. FHA 203(k) Rehab Mortgage

What is it? While you can find a more affordable property by purchasing a home in need of repairs, the cost of renovation can be significant. The FHA's 203(k) Rehab Mortgage helps homebuyers purchase and repair or modernize a home with a single mortgage. It can also be used to rehabilitate a home someone already lives in.

Key requirements: To qualify for an FHA loan for rehab, the home must be at least one year old. The rehabilitation cost must be at least $5,000, though the property's total value—rehabilitation included—must still fall within FHA's mortgage limits for the location. Covered improvements range from smaller modernizations to complete reconstruction. The property must meet certain structural and energy efficiency standards, though the list of eligible activities covered is extensive.

4. Mortgage Insurance for Disaster Victims Section 203(h)

What is it? Americans who lost their homes in a major disaster can qualify for a special FHA loan with no down payment. This 203(h) program is intended to provide low-cost mortgages to help disaster victims recover and either rebuild or buy another home. Unlike other FHA loans, no down payment is needed (though there are still the typical closing costs).

Key requirements: You must have lived in a presidentially designated disaster area, and your home must have been either destroyed or damaged enough that replacement or reconstruction is needed. The mortgage can be used to reconstruct or buy a single-family home, and it must be your principal residence. Those interested in qualifying for a Section 203(h) mortgage must submit their application to a lender within one year of the president declaring the disaster.

5. Good Neighbor Next Door

What is it? This program allows certain professionals to purchase homes in designated revitalization areas at a steep discount. Eligible workers include teachers, firefighters, law enforcement officers and emergency medical technicians. A limited number of properties are sold through the Good Neighbor Next Door program to eligible borrowers at 50% off the listing price. Additionally, these borrowers can apply for an FHA-insured mortgage and only pay a $100 down payment. If more than one person wants a property, someone is selected via random lottery.

Key requirements: You must be a full-time employee in a specified profession and plan to remain employed for at least a year. You and your spouse cannot have owned a home for a year prior, though you don't have to be first-time homebuyers.

With a Good Neighbor Next Door loan, you commit to living in the home for three years as your sole residence, re-certifying this annually (unless you're active-duty military). HUD requires participants to sign a second mortgage and note for the discount amount, but this "silent mortgage" has no interest or payments, and it goes away if the three-year occupancy requirement is met.

Boost Your Credit First

Even though FHA lending requirements can be more lenient than those for conventional loans, your credit is still checked and must meet the lender's requirements. Check your credit for free with Experian, and if it needs help, take steps to improve your credit before applying for an FHA loan so you're more likely to qualify, or to qualify for a lower interest rate.

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