An FHA Loan is a mortgage loan insured by the Federal Housing Administration (FHA). The FHA does not provide the loan; rather, it insures the loan for the lender. If the borrower defaults, the lender can seek recourse from the FHA. This lowers the lender's risk and makes them more likely to issue a loan.
The FHA was formed in 1934, and joined the Department of Housing and Urban Development in 1965. The organization has insured more than 33 million home mortgages since its inception. Today it continues to help low- and middle-income families move into their dream homes, by making it easier to obtain mortgages. More than 800,000 current homeowners have mortgages insured by the FHA.
One of the benefits of an FHA-insured loan is low mortgage rates. For single-family homes, down payments can be as low as 3 percent, making it possible to afford a higher-priced home than with a more conventional 10 or 15 percent mortgage. The FHA can also help home buyers finance their closing costs, and even offers mortgage insurance.
In addition, the FHA does not allow lenders to charge more than one percent for origination fees (what lenders charge for putting together loan documentation), and has no prepayment penalties, meaning that if you pay off the loan ahead of schedule, you won't be penalized. As with other mortgages, the lender may ask you to pay points, which generally equals one percent of the total cost of the home.
As is customary with most loans, you'll need to qualify for an FHA loan by meeting specific requirements, including:
- A good credit record;
- Enough money for a down payment, which can be as low as 3 percent;
- Total housing costs that are no more than 29 percent of your gross monthly income. Therefore, if your annual household income is $60,000, your housing costs, including principal, interest, property tax, and insurance, should not exceed $17,400, or $1,450 per month.
To obtain an FHA-insured loan, you need to find FHA-approved lenders and compare their loan offerings. Inquire about the income qualifications, which will vary by area. Also keep in mind that the maximum amount you can receive from FHA-insured mortgages varies from county to county, and from state to state. These mortgages are also subject to periodic improved adjustment, and that may be offered only in areas where residential real estate prices are high.
For more information, visit the FHA Mortgage Limits page of the U.S. Department of Housing and Urban Development (HUD) Web site.
Also read "Finding the Best Mortgage Loan Rate."