Do You Need to Take an FHA Home Loan? Understanding Its Hows and Whys.


What is an FHA loan?

An FHA loan, or a Federal Housing Administration loan, is an insurance-based loan that allows a person to purchase a house with as little as a 3 per cent down payment. To clarify, it does not give home loans. If a buyer fails to pay off his loan, the creditor gets compensated via an insurance fund.

Who are the best candidates for an FHA loan?

First-time home buyers and those that belong to the minority are the main targets of FHA loans. In 1934, the U.S. government established the FHA program to address the housing needs of many Americans through a financing system that involves insuring mortgages. Since then, housing conditions in the country have improved and more people had the chance to own their own homes.

Can you afford an FHA loan?

You can actually compute if you can afford and how much you can borrow through the FHA program. Most FHA loans require that your monthly housing costs do not go beyond 29% of your gross monthly earnings. How do you calculate this? Housing costs, which also known as PITI, are determined by combining your mortgage principal, interest, property tax and insurance together. Its like this: If you have a monthly income of $4000, then your maximum PITI is $1160. [$4000 x 0.29 = $1160]

The total monthly expenses, plus long term debt (credit card balances and other loans) and PITI, should also not exceed 41% of your gross income per month. Thus, taking the information above, if your monthly income is $4000, your maximum total monthly expense would be $1640. Subtracting the maximum PITI of $1160 from the maximum total monthly expense of $1640 results in $480, which is the maximum amount you should be paying monthly for long term debt, if you want to qualify for an FHA loan.

Traditional home loans usually require that the PITI stay under 26%-28% of the gross monthly income, while total monthly expense stay under 33%-36%. So, when you think about it, FHA loans are actually pretty lenient.

How do I qualify for an FHA loan?

You have to have a good credit history and enough income to show that you can support your loan and meet your payment obligations. At the time of closing the loan, you will be asked to place a down payment of about 2% to 3% of the homes price. This amount will be used to cover charges such as those involving the title search, title insurance, lawyers fees, homeowners insurance, loan origination fees and FHA insurance fund fees. If your down payment is less than 20% of the homes price, you will also be asked to pay a Private Mortgage Insurance fee.

The FHA loan has made a formidable contribution to the American society by allowing people to own their own homes via a less burdensome program. It is one of the reasons Americans are today considered the best housed in the world.