FHA Mortgages

The FHA or Federal Housing Administration is a mortgage program established by the government in 1934 to make home ownership more affordable for more Americans. Prior to its advent, prospective home buyers had to have at least 50% of the total home cost as a downpayment and mortgage terms were only between 1 and 5 years. The FHA program remains an attractive opportunity today particularly for many first-time buyers who would otherwise not have sufficient downpayment to afford a home, since down payments under an FHA mortgage can be as low as 3%. FHA mortgages are available for all home buyers, whether it is their first house or not.

The FHA encourages private lenders to provide mortgages by insuring that the total mortgage will be repaid if the borrower defaults on the loan. The FHA does not provide money to the buyer and it is still up to the finance company to decide whether or not they will approve the loan.

The FHA mortgage program tends to be more forgiving than conventional mortgages in terms of past credit history. A bankruptcy discharged as little as two years ago may not disqualify a buyer from an FHA mortgage.

Typically FHA mortgages require the homebuyer to pay no more than 3-5% of the total home value 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. The FHA will often pay ‘points’ – usually 1% of the total mortgage - to the lender in order to lower the interest rate of the mortgage.

Under the FHA plan, homebuyers will need to take out private mortgage insurance. PMI is used to insure the total of the mortgage will be paid in the event of a default. The PMI is usually required only until 20% of the mortgage has been paid off.

FHA mortgages have no mortgage value cap. That is, you can take out an FHA mortgage for $150,000 to $300,000 and up without any restrictions other than your credit applicability. Closing costs are the same as conventional loans - usually run between 2-3% of the total mortgage amount - and are the responsibility of the buyer, however they can be included with the total amount of the mortgage.

Qualifying For an FHA Mortgage

Although FHA mortgages are more forgiving when it comes to past credit history one still must have a somewhat satisfactory credit record, demonstrating an ability to maintain and pay off debts in a timely manner. FHA mortgages also come with income requirements; the borrower’s PITI - this includes principle, interest, property taxes and insurance - cannot exceed 29% of monthly income. As well, total long term debt (car loans, credit card balances, etc.) added with the monthly PITI cannot be more than 41% of 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 mortgage, this type of mortgage becomes even more desirable for many people.