What is FHA Loan?

An FHA (Federal Housing Administration) loan is a loan insured against default by the FHA. In other words, the FHA guarantees that a lender won’t have to write off a loan if the borrower defaults – the FHA will pay. Because of this guarantee, lenders are willing to make large mortgage loans.

Who can get FHA Loan?

Almost anybody can get an FHA loan. There are no income limits – like you may find with first time home buyer programs. However, there are limits on how much you can borrow. In general, you're limited to relatively small mortgage loans relative to home prices in your area. To find the limits in your region, visit HUD's Website. To qualify for an FHA loan, you'll need to have reasonable debt to income ratios. In general, you have to be better than 29/41, but some programs allow up to 55%. In addition, you have to have decent credit. You don't need wonderful credit to get an FHA loan; it just needs to be decent.

Why are FHA Loans so Great?

FHA loans are not for everybody. Nevertheless, they are a great help to some borrowers. FHA loans allow people to buy a home with a down payment as small as 3.5%. Other loans might not allow such a low down payment.

FHA loans offer a few other bells and whistles:
Easier to use gifts for down payment and closing costs
No prepayment penalty (a big plus for subprime borrowers)
An FHA loan may be assumable
Possible leniency during financial hard times
Funding for home improvement (through FHA 203k programs)