(Information obtained from HUD)

What is an FHA Loan? An FHA loan is a loan that is insured by FHA against non-payment by the borrower. Basically it gives the lender an incentive to extend large mortgage loans to borrowers because they won’t have to write off a loan. Should the borrower default, the FHA will pick up the loan, instead of the lender. In this way, the FHA encourages lenders to grant loans that they might otherwise reject. To fund the program, the FHA charges home buyers a fee or an upfront mortgage insurance premium (MIP) of 1.5% along with a small monthly fee obligation.

Who Can Obtain an FHA Loan? Unlike many first time homebuyer programs, FHA loans require no income limits from applicants. There are borrowing limits, however, restricting the homebuyer to relatively small mortgages. Almost anyone can qualify, providing the applicant has moderate debt to income ratios and decent credit.

The Benefits of an FHA Loan Although FHA loans are not for everybody, they are a great way to help those with a little less money that are interested in home ownership. FHA loans help potential homebuyers with low to moderate incomes who otherwise might not make it because they have less than perfect credit or can't come up with the cash needed for the down payment. FHA loans allow people to buy a home with a small down payment (sometimes as low as 3%), present no prepayment penalty, permit the borrower to use gifts for closing costs and down payments and may even offer leniency, should the homeowner suffer through a financial rough patch.

FHA Loan Limits FHA loans may not present the ideal solution if borrowers are looking for a large mortgage. With maximum loan ceilings varying by county, the limits on FHA loans can be a major deterrent. Relatively low loan amounts may not allow for the home of your dreams, but may offer a means to start building long-term wealth. Additionally, the mortgage insurance premium and monthly fees can sometimes cost more than other mortgage insurance plans. Borrowers with good or excellent credit may elect to utilize other standard loan programs with more competitive offers that beat FHA loans.

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