Financing Your Home

with an FHA Loan

FAQ's

What is an FHA Loan?

What are the advantages of an FHA loan?

Are FHA loan processes complicated?

Who is eligible for an FHA loan?

What is mortgage insurance, and how does it apply to FHA loans?

What are the different types of FHA loans?

What are the interest rates on FHA loans?

What are my expenses when taking out an FHA loan?

What Is an FHA Loan?

The FHA loan program was established by the government in 1934 to improve the existing housing standards and conditions. Before this time, home buyers usually had to have at least 50% of the total cost of the house as down payment, and payments were only stretched out between 1-5 years. FHA stands for Federal Housing Administration, which is a government corporation established strictly for improved housing conditions for Americans. To get more FHA Loan Information try visiting the official site for FHA Loans.

An FHA loan can be an attractive proposition for many first time homebuyers, as down payment requirements for an FHA loan can be as low as 3%. However, FHA loans can be taken out by any homebuyer, whether this is their first house or not. The only stipulation is that a purchaser can only have one FHA loan at a time.

How an FHA Loan Works

The FHA does not loan the money to a buyer, it simply insures that the total mortgage will be paid to the lender in the event that the buyer defaults. It is always up to the private lender (bank, credit union, savings and loan) to decide whether or not they will lend the money.

The FHA loan program tends to be more forgiving than conventional loans in terms of past credit history. A bankruptcy discharged as little as two years ago may not hinder a homebuyer from qualifying for the FHA program.

FHA loans typically do not require the homebuyer to pay more than 3-5% of the total mortgage amount as down payment. Unlike traditional loans, this money may also be a gift to the homebuyer, and does not need to be secured as the homebuyer's own money. Often, there are "points" associated with the FHA loan that are usually worth about 1% of the total mortgage value. These points are paid to lenders in order to help lower the interest rate of the mortgage.

Borrowers will also have to pay PMI (private mortgage insurance) on the loan. PMI is used to insure the total of the loan will be paid in the instance of a default. A PMI usually will be put into effect until 20% of the mortgage has been paid off.

FHA loans are known to have no mortgage value cap. In other words, you can take out an FHA loan for $150,000 to $300,000 and up without any restrictions other than your credit applicability.

Closing costs on FHA (or conventional loans) usually run between 2-3% of the total loan amount and are the responsibility of the buyer. However, they can be financed into the total amount of the mortgage and paid off accordingly.

Qualifying For an FHA Loan

First of all, to be approved for an FHA loan, you must first have a satisfactory credit history showing your commitment to maintaining and paying off debts in a timely manner. There are also relatively strict income requirements, and you must be able to prove that the total monthly mortgage payment will be less than 29% of your monthly income. The number arrived at after multiplying your total monthly income with 29% is referred to as PITI. The PITI amount is the highest amount that your monthly mortgage payments can be, and this includes principle, interest, property taxes, and insurance. As well, your total long term debt (car loans, credit card balances, etc.) added with the monthly PITI cannot be more than 41% of your total monthly income.

While these numbers may seem a little stringent, they are actually more lenient than traditional mortgages. Combining the decreased down payment amount required with an FHA loan, this type of loan becomes even more desirable for many people.

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