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FHA Mortgages

Purchasing a new home is an exciting and stressful time. Finding the right home for you and your family requires a great deal of work and decision making. However, finding the right mortgage is just as important as finding the right home. See our Finance center

Many Americans take advantage of FHA loans when purchasing a home.

An FHA mortgage can be an attractive option for many first-time homebuyers, as down-payment requirements for a FHA mortgage can be as low as 3 percent. However, you don’t need to be a first-time buyer to take out a FHA mortgage; the only stipulation is that a purchaser may only have one FHA mortgage at a time.

History of the FHA

The FHA, or the Federal Housing Administration, was established by the government to improve housing conditions for Americans. The government established the FHA mortgage program in 1934 to improve existing housing standards and conditions. Prior to 1934, a down payment was typically 50 percent of the home’s price and payments were stretched out between only 1-5 years. You can learn more about FHA loans from the Department of Housing and Urban Development.

How a FHA Mortgage Works

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

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 hinder a homebuyer from qualifying for the FHA program.

Typically, FHA mortgages do not require more than a 3-5 percent 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 FHA mortgages that are usually worth about 1 percent of the total mortgage value. These points are paid to lenders to help lower the interest rate of the mortgage.

Borrowers will also have to pay PMI (private mortgage insurance) on the mortgage. PMI is used to ensure that the total amount of the mortgage will be paid to the lender if the buyer defaults. Usually, a PMI will not be put into effect until 20 percent of the mortgage has been paid.

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

Learn more about the recent reforms to FHA loans.

Qualifying For a FHA Mortgage

To be approved for a FHA mortgage, you must have a satisfactory credit history, which shows your commitment to paying off debts in a timely manner. Also, you must be able to prove that the total monthly mortgage payment will be less than 29 percent of your monthly income. The number arrived at after multiplying your total monthly income by 29 percent is referred to as PITI, or principle, interest, property taxes, and insurance. The PITI amount is the highest amount that your monthly mortgage payments may be. Furthermore, long-term debt, such as car loans and credit card balances, in addition to the monthly PITI amount cannot be more than 41 percent of your total monthly income. More information about loan qualifications is available from the FHA.

While these qualifications may seem a little stringent, they are actually more lenient than traditional mortgage qualifications. The decreased down payment makes this type of mortgage even more desirable for many people.


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