What Is a FHA Mortgage Loan?

The FHA was formed in 1934 and joined the Department of Housing and Urban Development in 1965. The organization has insured more than 33 million home mortgages since its inception. Today they continue to help low- and middle-income families move into their dream homes by making it easier to obtain mortgages. More than 800,000 current homeowners have mortgages insured by the FHA.

One of the benefits of an FHA-insured loan is low mortgage rates. For single-family homes, down payments can be as low as 3 percent, making it possible to afford a higher priced home than with a more conventional 10 or 15 percent mortgage. The FHA can also help home buyers finance their closing costs, and even offers mortgage insurance.

The FHA also does not allow lenders to charge more than 1 percent for origination fees (what lenders charge for putting together loan documentation together) and has no prepayment penalties, meaning that if you pay off the loan ahead of schedule, you will not be penalized. Like with other mortgages, the lender may ask you to pay points, which typically equal 1 percent of the total cost of the home.

As is customary with most loans, you will need to qualify for an FHA loan by meeting specific requirements. You will need:

• A good credit record.
• Enough money for a down payment, which can be as low as 3 percent.
• Total housing costs that are no more than 29 percent of your gross monthly income. Therefore, if your annual household income is $60,000, your housing costs, including principal, interest, property tax, and insurance should not exceed $17,400 or $1,450 per month.