What€™s an FHA loan? 
It€™s a mortgage insured by the Federal Housing Administration. It can be a fixed-rate loan or an adjustable. However, the FHA does not insure non-traditional loans such as €œpayment option€ adjustable-rate loans. The agency also requires verification of your income and assets and a full home appraisal to make a loan.
Don€™t most lenders require verification of income and full appraisals?
They once did €“ and are increasingly demanding them now. But, for many years, many lenders offered €œlow doc€ and €œno doc€ loans, meaning instead of full documentation they essential took your word that you had enough income to make your payments. The FHA requires tax returns and pay stubs to verify income. As for appraisals, a lender making an FHA-insured loan must use an FHA certified appraiser who will walk through the house, taking notes and measurements, before estimating its value. The agency doesn€™t accept €œdrive-by€ appraisals (the appraiser just photographs the exterior) or fully automated appraisals (a computer estimates the value based on sales of comparable homes in the neighborhood). On the bright side, the FHA doesn€™t discount the value the appraiser comes up with to account for a declining price environment, as many other lenders are now doing, said Jeff Lazerson, president of Mortgage Grader, a Web-based loan shopping service.
What about down payments?
FHA loans were originally intended to help first-time home buyers, so the down payment requirements are very flexible. The buyer can put as little as 3% down*, and it€™s OK if you get that money from a relative. A year ago, non-FHA loans were easy to get with a low down payment €“ or even no down payment. But now lenders are generally requiring at least 10% down and may try to ensure that you€™re using your own money for the down payment. And many lenders are requiring extra money upfront in areas where home prices are declining. Indeed, FHA loans may be the only game in town for people who have relatively small down payments, Lazerson said.
What if you don€™t have great credit?
The agency takes your credit history into account but is willing to consider €œcry letters€ explaining the negatives on your credit report, Lazerson said. If your credit woes were caused by reasonable, one-time events €“ such as a divorce, medical problem or a temporary job loss €“ it won€™t necessarily disqualify a borrower, he said. However, people with recent bankruptcies or who can€™t verify their incomes are unlikely to qualify for an FHA loan.
What€™s the largest FHA loan available?
In high-cost areas such as Los Angeles, New York and San Francisco, the maximum FHA loan amount is $729,750. The maximum is less in cheaper areas. To find the limit in your area, go to https://entp.hud.gov/idapp/html/hicostlook.cfm and plug in your city and state.
Who shouldn€™t consider an FHA loan?
People who are borrowing less than 80% of their home€™s value can probably get a better rate outside of the FHA program. That€™s because rates are a touch higher on FHA loans than non-FHA loans. Plus, FHA borrowers must pay for mortgage insurance.
How much more costly?
The interest rate on an FHA loan is likely to be about one eighth of a percentage point higher than the market rate on a comparable uninsured loan. In addition, during the early years of the loan a half-point fee is added to your interest rate to pay for mortgage insurance. And you must pay a fee of 1.5% of the loan amount upfront, also for insurance.
L.A. Times – Kathy M. Kristof March 23, 2008
*Special Notes:
€¢ The conforming loan limit for FHA and Conventional loans in €œhigh cost€ areas will drop from $729,750 to $625,000 on Jan. 1, 2009
€¢ FHA minimum down payment will increase from 3% to 3.5% on Jan. 1, 2009.
€¢ Condo projects now need only 4+ units to qualify for and FHA €œspot€ condo approval
