FHA Loans: Are They Right For You?

While the news is rife about how hard it is for even qualified borrowers to secure loans, a number of homebuyers are getting financing and saving money by taking advantage of one of today’s most popular mortgage options: FHA loans.

FHA loans are offered by the Federal Housing Administration, which is a department of the Department of Housing and Urban Development (known popularly as HUD). The FHA was developed during the Great Depression to engender homeownership across all socioeconomic levels of American society, and to ensure the integrity of that housing. Today, the FHA is one of the primary funding vehicles for homebuyers, playing a role in over half of all mortgages used in home purchases since the housing debacle began in 2007.

Although buyers often talk about “FHA loans,” in reality, the FHA doesn’t loan money out at all. Instead, for borrowers that fall under the requirement guidelines for their lending program, the FHA agrees to underwrite (guarantee) loans issued by other lenders. With the express guarantee of the federal government behind them, borrowers are then able to secure favorable loan terms which they may not otherwise receive. Among the benefits of an FHA loan are:

• Low or no downpayments. Most FHA programs require at least 3.5 percent down—far less than the standard 20 percent required by most lenders today.
• Lower closing costs and fees. The FHA caps fees that lenders can charge, making closing costs more affordable.
• The possibility to include home repair costs in an initial loan. The FHA offers a little-known 203k program, which allows borrowers to roll the costs of future home repairs and renovations into their initial loans.
• No pre-payment penalties, offering flexibility and financial freedom to borrowers.

Guidelines for FHA qualification are generous, meaning that most households can qualify for an FHA loan, whatever the state of their credit. There are no income limits for FHA loans, however borrowers may find that the loan limits applicable in their area may only enable them to purchase on the lower side of the price spectrum. FHA debt-to-income limits vary according to the program used.

In short, FHA loans are a flexible, borrower-friendly financing option that can mean the difference between buying a home and remaining a renter for many households. For borrowers looking in the middle-to-upper ends of the housing market, FHA loan limits may be too low to help them fund a purchase. However, for those with lingering credit issues, difficulty in accumulating a 20-percent downpayment, or for buyers interested in buying a remodel, an FHA-backed loan may make perfect sense.