The FHA is an abbreviation for the Federal Housing Administration, which was created in 1934. At this time the Great Depression was causing many people to have their homes foreclosed upon. One of the functions of the FHA is to insure the loan so that the FHA approved lender doesn’t have to take a big risk with the borrower. The Federal Housing Administration does not operate at a cost to the taxpayer, the homeowner pays for the insurance on the loan and the insurance is the FHA’s income.
The FHA has guidelines for its loans – they would like your mortgage to be 31% of your gross monthly income and your total debt should only be 43% of your monthly income. The FHA also puts a limit on the amount you can borrow, which is based on the median cost of homes in the area you are looking to purchase. This cost is adjusted annually to stay current with the local market. If your credit score is at least 580, your down payment is only 3.5%, if your credit score is 500-579 the down payment would be 10%.
The FHA loan can be a good way to buy your first home or if you have less than perfect credit. That is because the guidelines are less strict than what other lenders are offering.