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FHA Mortgage Loans

An FHA loan is a home loan made by a private lender to a home buyer (or to refinance an existing loan). If the loan is made in a way that conforms to the guidelines set forth by the Federal Housing Administration (FHA) the loan is eligible for FHA mortgage insurance. This insurance protects the private lender from any financial loss that would occur if the borrower defaults and the lender must foreclose. With this reduced element of risk, lenders are provided an incentive to make loans which otherwise would either carry higher interest rates or could not be made at all.

What are the special features of FHA loans that require this government insurance in order to induce lenders to participate? In short, FHA insurance allows lenders to make loans to borrowers with a low down payment. In addition, FHA guidelines permit loans with heightened risk factors related to the borrower's credit history or the borrower's ability to make the down payment or monthly payments from their own resources.

Here's an overview of some special features that the FHA loan program offers and what it requires.

Special Features of the FHA Loan Program

Less cash needed

3.5% down

The entire down payment can be a gift from a family member.

Borrower does not need to prove cash reserves (extra money left over, after paying for down payment and closing costs) unless the property is a tri-plex or four-plex.

6% seller concession: the seller can pay the buyer's closing costs, up to 6% of the purchase price, including pre-paid property taxes and insurance.

More Lenient Credit Requirements

FHA loans are not for "subprime" borrowers but the FHA program permits a mortgage for low credit scores as long as the score is not below a certain minimum.

For most FHA loan transactions, credit scores as low as 620 permitted. In some cases the minimum score may be higher. Financial Help from Family OK.

As mentioned above, the entire down payment can be a gift from a family member.

Family members can go on the loan to help the main borrower qualify for the monthly payments. (1-unit properties only, not available on cash-out refinance transactions.)

Maximum FHA Loan Amounts

Although there are no income limits for FHA borrowers, FHA loans are intended for home buyers of moderate means. The program achieves this purpose by setting limits on the maximum loan amount. The limits vary in two ways:

By type of property (number of dwelling units)

By county (some counties are considered "high cost" and have higher limits

Maximum FHA loan amount limits are as follows:

FHA Loan Amount Limits*

Number of Dwelling Units	Maximum Loan Amount
1	$729,750
2	$934,200
3	$1,129,250
4	$1,403,400

*Lower limits might apply in specific counties. To look up FHA limits by county (in a new browser window), click here.

Important Facts about FHA Loan Requirements

Full Documentation

Borrowers must be able to fully document their employment, income and financial assets. "Stated income" and "no documentation" is not allowed.

Maximum Debt-to-Income Ratios

Income needed to qualify is gauged by "debt to income ratios." As a starting point, the ratio of housing expense to income should not exceed 31%, and the ratio of total monthly debt payment to income should not exceed 43%. If these ratios are exceeded there must be strong compensating factors present in the borrower's financial situation to overcome excessive debt to income ratios.

Mortgage Insurance

FHA mortgage insurance is required on all FHA loans, even if a large down payment is made.

Presently, the FHA mortgage insurance premiums, as a percentage of the loan amount, are as follows:

Up front premium: 2.25% (may be financed by adding it to the loan amount)
Annual premium: 0.50% of loan amount, unless loan exceeds 95% of property value; then the premium is 0.55%. These premiums are split into monthly amounts rather than paid annually.

Impounds for Taxes and Insurance

Impounds, or money placed into escrow for payment of future property tax and insurance bills, are required. Instead of paying these bills when due (usually twice a year), FHA borrowers put in cash at closing to fund an impound account, and keep it replenished with extra amounts included in the monthly mortgage payments. The lender then pays the property tax and insurance bills from this account. This approach is a safety measure for both borrower and lender. It assures that the money to pay property taxes and insurance is always present when needed and keeps the borrower from forgetting to make the payments.