FHA stands for Federal Housing Administration, which is a part of the Department of Housing and Urban Development (HUD). FHA mortgages are mortgages insured by this government agency.

Why were FHA mortgages created?

In 1934, FHA mortgages were created as an answer to the suffering of millions of Americans during the Great Depression. The purpose behind creating it was to help low and moderate-income families, get a mortgage and buy a decent home for themselves.

The FHA insures the mortgage, which means that if the borrower were to default in the loan, the FHA will pay the lender. The FHA will use the insurance premiums collected from the borrower to pay off the mortgage in such an event. More lenders are willing to offer such a loan because of this insurance benefit from the government.

If you took out an FHA loan, the FHA will charge you a fee every month in return for their services. You have to also pay an upfront mortgage insurance premium (MIP) of 1.5%.

Ideal candidates:

• People who have an income that ranges from a low to a moderate income level.

• First time home buyers.

• People with credit problems.

• In case of those who have changed jobs, lost their job or had to undergo a major illness, their credit history will be excused when they apply for this loan.

How do you qualify?

If you want to know if you qualify for an FHA loan, your finances should look something like this:

• You income level should be either average or low however, it must be a steady income. Suppose your income is not steady, don’t worry the FHA will still insure the loan, but the point is to have a steady income as this can help you.

• You should have had no bankruptcies in the past two years and you should have committed to no foreclosures in the past three years.

• You should have paid up all your tax debts

• If you owed money, your payment for these dues must have been within 30 days in the last two years.

• You should have enough cash reserves to pay for the 3% down payment that’s required. For example if you are buying a home worth $200000, the down payment on this would be 200000 * 3% which is $6000.

Now if your financial situation is such that your credit is deemed unacceptable by the FHA, you can still get an FHA loan if you are able to satisfy the following criteria:

• Show ability to make a larger down payment than what is required.

• Show proof of an expected increase in income in the near future.

• Good cash reserves and hardly used credit.

• Show capabilities of being able to save money.

• Taking a FHA to buy an energy-efficient residence

Applying for an FHA Loan

If you feel you come into the criteria of applying for a FHA loan, there is no better. Here’s is a look at how you can apply:

Step 1: Prepare required documents such as tax documents, bank documents and personal documents.

Step 2: Compare rates offered by lenders who offer FHA loans and settle down to one lender whom you feel is best.

Step 3: Fill in your FHA Loan application, the down payment and any mortgage insurance.

Step 4: Buy your home.

Benefits of an FHA Mortgage

When you apply for an FHA mortgage, you stand to gain in many ways. Here’s a look at the benefits you get from an FHA loan:

• No need to submit credit scores.

• The down payment is as low as 3% and other loan types don’t even come close to this percentage.

• The property you buy must meet certain standards, which is god for you.

• The mortgage insurance that you have to pay is pretty low.

• There are special discounts available for certain people.

Now, this does not mean that an FHA loan is suitable for everyone. There are limits to the amount you can borrow. If you are interested in buying a large or expensive home, the loan limits of this loan type may not cover the total cost of the home. In a city like say, New York where an average home costs more than $400,000 you have to take up other forms of finance to make up for the extra money you need to buy a moderate home here.