What is FHA Mortgage Insurance?

FHA mortgage insurance protects lenders against loss if the homeowner defaults on their mortgage loan. The lenders bear less risk because FHA will pay the lender if a homeowner defaults on their loan. Loans must meet certain requirements established by FHA to qualify for insurance.

Why does FHA Mortgage Insurance exist?

Unlike conventional loans, FHA-insured loans require small down payments. There is more flexibility in an FHA loan than conventional loans in calculating household income and payment ratios. The cost of the mortgage insurance is passed along to the homeowner and typically is included in the monthly payment. In most cases, the insurance cost will drop off after five years or when the remaining balance on the loan is 78 percent of the value of the property-whichever is longer.

How is FHA funded?

FHA operates entirely from self-generated income and costs the taxpayers nothing. The proceeds from the mortgage insurance paid by the homeowners are captured in an account that is used to operate the program entirely. FHA provides a huge economic stimulation to the country in the form of home and community development, which trickles down to local communities in the form of jobs, building suppliers, tax bases, schools, and other forms of revenue.

History of the Federal Housing Administration

Congress created the Federal Housing Administration (FHA) in 1934. The FHA became a part of the Department of Housing and Urban Development's (HUD) Office of Housing in 1965.

When the FHA was created, the housing industry was flat on its back:

• Two million construction workers had lost their jobs.

• Terms were difficult to meet for homebuyers seeking mortgages.

• Mortgage loan terms were limited to 50 percent of the property's market value, with a repayment schedule spread over three to five years and ending with a balloon payment.

• America was primarily a nation of renters. Only four in 10 households owned homes.

During the 1940s, FHA programs helped finance military housing and homes for returning veterans and their families after the war.

In the 1950s, 1960s and 1970s, the FHA helped to spark the production of millions of units of privately-owned apartments for elderly, handicapped and lower income Americans. When soaring inflation and energy costs threatened the survival of thousands of private apartment buildings in the 1970s, FHA's emergency financing kept cash-strapped properties afloat.

The FHA moved in to steady falling home prices and made it possible for potential homebuyers to get the financing they needed when recession prompted private mortgage insurers to pull out of oil producing states in the 1980s.

By 2001, the nation's homeownership rate had soared to an all time high of 68.1 percent.

The FHA has insured over 34 million home mortgages and 47,205 multifamily project mortgages since 1934. FHA currently has 4.8 million insured single family mortgages and 13,000 insured multifamily projects in its portfolio.

In the more than 60 years since the FHA was created, much has changed and Americans are now arguably the best housed people in the world. FHA has helped greatly with that success.

How Much Home Can I Buy With My FHA Mortgage?

What have you heard about qualifying for an FHA Loan?

• Only inexpensive homes are allowed? Not true!

• You need a lot of money for a down payment? Not true!

• You need perfect credit? Not true!

• Your credit score has to be at least 650? Not true!

• If you ever declared bankruptcy or had a foreclosure, you're out of luck? Not true!

None of these things are true. To decide the price of the home you can buy we look at:

• Your income

• Your other monthly expenses

• Your credit history (this is important, but FHA's credit standards are very flexible)

• Your overall pattern rather than the individual problems you may have had

Your lender will be responsible for determining if you qualify for an FHA loan, but the information below will help you understand the process.

There's one thing you must be prepared for, your lender will need a lot of information from you. Don't let the lender's requests upset you. They're just doing their job, and it will all pay off. Once you're in your new home, it will all be worth it! They must know:

• How much you earn

• Where you've worked

• Whether you're single, married or divorced

• If you've had credit problems in the past, they'll need to know why

While only a lender can actually qualify you for a loan, if you follow the steps outlined here, you should get a pretty good idea of whether you might be approved. You might even become pre-qualified for an FHA loan right here!

FHA Loan Basics

Here are a few key facts about FHA loans:

Maximum loan amount: By law, FHA cannot insure loans that exceed certain amounts based on the metropolitan area or county in which you live. The highest maximum FHA mortgage right now is $362,790. The lowest maximum amount is $200,160. To see what the limit is in the place where you want to live, go to the FHA Maximum Mortgage Limits.

Maximum financing: Depending on the state where the property is located, the maximum FHA financing will be either 98.75% or 97.75% of the appraised value of the home or its selling price, whichever is lower.

Cash required: FHA requires that the homebuyer invest at least 3% of the sales price in cash for the down payment and closing costs. If the sales price is $100,000 for example, the homebuyer must invest at least $3,000. However, the homebuyer can use gifts from family, funds from local, state or government agencies, or other sources for the down payment. Non-FHA loans may not allow this.

Okay. Let's get started.

Eligibility for an FHA Mortgage

The first step is meeting FHA's basic eligibility requirements. These involve some very general requirements that are pretty easy for most people to meet. The second part is meeting the qualification requirements. This is where your income, your credit history and your savings are evaluated. It's a little more complicated than basic eligibility, but don't worry. Millions of people qualify for mortgages every year, and you can too!

Generally, to be eligible for an FHA loan, you must:

• Have a valid Social Security Number (SSN)

• Be a legal resident of the United States

• Be of legal age to sign a mortgage in your state. There is no maximum age limit for a borrower.

Even if you are a U.S. citizen, you must still have a valid Social Security Number (SSN). An individual Tax Identification Number (ITIN) is not an acceptable substitute for a SSN.

U.S. citizenship is not required for eligibility. When you indicate on your loan application that you hold something other than U.S. citizenship, the lender must determine your residency status from the documentation you provide. If you are a permanent resident alien, you must provide evidence of lawful permanent residency issued by the Department of Homeland Security, Bureau of Citizenship and Immigration Services (BCIS), formerly the Immigration and Naturalization Service (INS). If you are a non-permanent resident alien, you must show that you are eligible to work in the U.S. by producing an Employment Authorization Document (EAD) issued by BCIS.

Qualifying for an FHA Mortgage

Your lender will decide if you qualify for a mortgage based on the "Four 4 C's of Credit":

• Credit history

• Capacity to repay

• Cash to close

• Collateral

Your credit history involves what you've borrowed in the past, and how well you've paid it back. Capacity refers to your income and your ability to handle the monthly housing payments. Cash to close refers to money for the down payment and closing costs. Collateral refers to the home you're buying.

There is one other thing that is important to remember: A lender cannot reject your loan application based on a lack of credit history or your decision not to use credit. If you do not have an established credit history, or if you do not use traditional credit, the lender must develop a credit history from utility payment records, rental payments, automobile insurance payments or other direct reports from credit providers.

Manual vs. Automated Processing

It is standard industry practice for a lender to use Automated Underwriting Systems (AUS) to evaluate loan applications. An AUS processes key information like your credit score, your monthly income, how much you want to borrow, how much cash you've saved, and the value of the property you want to buy. Based on this information, the AUS produces a report recommending approval or denial of your loan application.

Manual underwriting involves the evaluation of your information by a person called an underwriter in the lender's office. The underwriter will apply his or her knowledge of FHA underwriting standards to your information, and make a decision to approve the loan or not.

Your lender may use either or both types of underwriting to process your loan, but there's one important thing you need to know: you can't be turned down for an FHA loan just because an AUS report doesn't recommend approval. If the AUS report doesn't recommend approval, it could mean that your loan has to be processed manually.

You can apply for an FHA loan at no charge by applying with us online.

Credit History Questions

To find out how much of a home you can afford, simply go to our free mortgage pre-approval and submit the information.  It is a good idea to get pre-approved for a loan. That means applying for a mortgage before you actually start looking for a home. Then you'll know exactly how much you can afford to spend, and it will speed the process once you do find the home of your dreams!