Indianapolis Area Real Estate Blog

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.


#1 By Alex at 9/14/2011 4:34 PM

I live in CA and used an FHA loan for our first home purchase several years back. As a younger couple starting out, this was a great option for us!

#2 By Paula at 9/14/2011 5:46 PM

Alex - FHA loans are a great option, especially for first time home buyers. When I was a Realtor in California, prices were going up quickly and FHA had not adjusted their limit, so I never had a buyer using an FHA loan.

#3 By Debbie Miller at 9/14/2011 10:05 PM

Thanks for the info! I'm looking into buying a condo right now and learning about FHA loans, so this is definitely valuable info.

#4 By Paula at 9/15/2011 4:43 AM

Debbie - glad you could use the information; have fun home shopping :)

#5 By Mike at 10/3/2011 5:11 AM

I have used FHA to finance investment property. Great option for some 2-4 unit properties.

#6 By Corona Real Estate Craig at 10/28/2011 2:54 AM

I was recently informed that FHA loans are assumable. This is the perfect time to get an FHA loan. When values increase again (and they will... history tells us that), and interest rates increase again (can anyone say Inflation?) then these 4% assumable loans are going to be a great asset in getting your home sold over the competition. Woohoo!!

#7 By Liz at 3/2/2012 1:02 AM

What I like most for FHA loans is its low downpayments. Some home loan services has a huge downpayment which they can't afford to pay. If we use FHA loan we might be able to get the best home loan that we need.

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