Federal Housing Administration (FHA) Loan

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FHA loans are a popular choice for home buyers, although the program isn’t reserved only for first-time buyers. A wholly owned government corporation, the FHA has been around since 1934, with the goal of improving housing standards and conditions and providing adequate home financing through insurance of mortgages. Its loans feature reduced down-payment standards, lower mortgage insurance charges, and an approval process that’s more relaxed than conventional mortgage loans.

The FHA loan program requires only 3 percent down and is typically more forgiving of past credit issues, but it requires that borrowers not have a bankruptcy discharged within the last two years; that they not have a foreclosure within the last three years; and that any outstanding collection amounts, judgments, or charge-offs be paid in full before closing. The advantages of using an FHA loan include the following:

• A lower down payment is required.
• FHA loans are assumable (transferable to a new buyer) with a qualified borrower.
• Higher qualifying ratios of 29 percent for housing and 41 percent for total indebtedness are allowed on existing construction; 31 percent for housing and 43 percent for total indebtedness are allowed on new construction.
• The underwriting (approval) standards are more flexible.
• Gift funds for down payment and closing costs are allowed.
• The up-front mortgage insurance premium can be financed.
• Less cash is required out of pocket.
• The down-payment requirement (as low as 3 percent and never more than 5 percent) is the lowest of any non subsidized financing program.
• Non-occupant co-borrowers are allowed for qualifying purposes.
• The seller is allowed to pay prepaid expenses (closing costs) and can pay up to 6 percent of the purchase price toward closing costs and discount points.
• Charges on conventional loans such as tax service fees, underwriting fees, copy fees, and courier fees are not allowed to be charged to the buyer.

Find out more about how FHA loans work from your lender or mortgage broker, or visit HUD’s Office of Housing Web site at www.hud.gov/offices/hsg/index.cfm.

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