An FHA loan is one backed by the Federal Housing Administration.  First formed in 1934 by the National Housing Act, the FHA was created to increase the construction of new homes, reduce unemployment, and operate a variety of loan insurance programs.

The FHA is currently the largest funder of mortgages in the world, funding millions of mortgages since its creation.

In practical terms, FHA loans are fully insured by the FHA, which means the lending institution will be fully repaid by the FHA if the borrower defaults for some reason.

Who Qualifies for an FHA Loan?

Almost anyone who wants an FHA loan can get one.  Borrowers do not face income limits, but they do have a certain limit on the total amount they can borrow.  In general, the FHA limits borrowers to smaller home prices specific to a region.

The main point of concern for borrowers is that they need to have a debt-to-income ratio somewhere between 29-41%.  All this means is that your total debt payments, including your mortgage, typically cannot exceed 41% of your gross monthly income.

So, if you have a gross monthly income from your job of $4,000, your total debt payments cannot exceed $1,640.

The FHA is also more lenient with your credit score.  You won’t need an excellent credit score just to qualify for an FHA loan.

Why Would You Use an FHA Loan?

While these loans may limit the total amount you can borrow for a home, limiting the home’s size and location, they are a great solution for people with limited access to cash.

You can buy a home with as little as a 3.5% down payment.  If you’re looking for a mortgage in Utah, mortgage companies typically look for at least a 10% down payment, and in most cases, 20%.

So, if you’re looking at a $200,000 home, for example, a 20% down payment would be $40,000; a 10% down payment would be $20,000; and a 3.5% down payment would be $7,000.

As you can see, if you’re in a situation where you can afford the mortgage payments, are ready to purchase a home, but don’t necessarily have the liquid cash available to make the down payment, FHA loans are a great solution.

Other reasons you may choose one of these loans might be:

• They make it easier to use gifts to pay closing costs and the down payment.
• There is no prepayment penalty.
• The mortgage is assumable, meaning someone else can simply take it over instead of having to find his or her own lender to provide a mortgage.
• Leniency may be provided if you end up going through difficult financial times.
• You may be offered funding for home improvement projects

Funding for Home Improvement Projects Through the FHA 203k Program

If you would like to rehab a home that needs work, the FHA 203 program is the source of funds you’ll need.

The FHA 203k program has very competitive rates, and helps to reduce the work to complete the process by providing you just one loan for your home and its improvement (instead of a home and home improvement loan).

You also might be able to buy a home banks would typically rather not fund.

The downsides of a 203k are that you may have tons of bureaucratic red tape to jump through when doing the home improvement projects, and you may be required to fix things you didn’t initially intend to.

Now You’re an FHA Loan Expert!

Now you know just about everything you need to know about the FHA home loan process.  It certainly opens many doors for people who wouldn’t otherwise be able to afford a home loan.

Share the information with your friends and family, or feel free to take advantage of it yourself!