FHA Loans

FHA Loans

The Federal Housing Authority (FHA) is part of the U.S. Department of Housing and Urban Development (HUD). The FHA does not actually lend money to borrowers. What the FHA does is insure loans (called 203(b) Mortgage Insurance) so that they are shielding lenders from loss should a borrower default on the loan. This effectively reduces the lender's risk allowing them to provide easier qualification for a loan, lower down payments, and lower closing costs. So an FHA Loan is a loan made by a lender that is insured by the FHA.

Features of FHA Loans

FHA loans are an excellent vehicle for the first-time home buyer. FHA loans are available as fixed rate mortgages (FRMs) and adjustable rate mortgages (ARMs). Some of the features of an FHA loan include:

  • Available for 1 to 4 unit properties, as well as condominiums and manufactured homes
  • Less stringent qualifying requirements
  • Down payments can be as low as 3% (or 97% loan-to-value)
  • FHA regulates closing costs
  • Most closing costs and fees can be included in the loan
  • Gifts for down payments and closing costs are allowed
  • Will allow a home purchase two years after a bankruptcy
  • Will allow a home purchase three years after a foreclosure

Qualifying for an FHA Loan

Because an FHA loan is insured by the FHA, many of the qualification criteria are not as stringent as they would be. The borrower does, however, have to be able to afford the loan. For that reason, a borrower's monthly housing costs should not exceed 29% of their monthly income (this is some times referred to as the housing ration). Remember that total housing costs include mortgage principal and interest, property taxes, and homeowner's insurance (often referred to as PITI).

In addition, a borrower's monthly expense to to cover all debt, home and consumer debt (car loans, personal loans, student loans, credit cards, etc.) should not exceed 41% of their monthly income.

To obtain an FHA loan, individuals need to apply to a HUD approved lender.

FHA Loan Limits

FHA loan limits vary by location. It should be noted, however, that FHA loans are oriented toward lower-income borrowers. As such, the FHA loan limits make an FHA loan appropriate only for lower cost homes. For example, the FHA loan limits for a couple of sample cities are:

Boston, MAWichita, KS
1-Family $362,790 $200,160
2-Family $461,113 $256,248
3-Family $560,231 $309,744
4-Family $646,421 $384,936

To look up the FHA loan limits in your area see: https://entp.hud.gov/idapp/html/hicostlook.cfm

Other HUD Loan Programs

HUD also has other specialized programs to help certain identified groups purchase a home. These programs include:

  • Firefighter/Emergency Medical Technician NextDoor
  • Officer Next Door (law enforcement officers)
  • Teacher Next Door
  • Hurricane Evacuees discounted sales
  • Homeownership for public housing residents
  • Indian Home Loan Guarantee Program

For More Help

To get more advice on FHA and other HUD loan programs, contact a HUD-approved housing counselor or call (800) 569-4287.

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