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The Federal Housing Authority (FHA) offers loans to qualified home buyers. The most common FHA limits, or lending restrictions, are credit score, debt to income ratio, and amount of the mortgage. In 2011, FHA loans usually also require at least 3.5% down payment, mortgage insurance, and an FHA approved appraisal of the property.
FHA loans are available for residences. One of the FHA limits is that only part of the property — no more than 25% — may be for business or commercial use. An FHA loan is primarily designed to help individuals become homeowners. Therefore, one of the FHA limits is that the property must be used, for the most part, as a residence. Loans are available for properties with up to four housing units.
There are also limitations to the amount of the mortgage. Usually, the maximum mortgage is 115% of the median value of housing for a given area. The maximum is higher for areas with higher housing costs than for areas with lower housing costs. It also varies according to the number of residential units on the property, so there is a higher maximum for a four family unit than for a single, two family, or three family unit.
Traditionally, the FHA limits for an applicant's debt to income ratio and credit score are more lenient than other lending limits. In some cases, the applicant's debt to income ration can be as much as 55%, and the credit score can be fair to good. Individuals who have gone through bankruptcy may qualify for an FHA loan within two to three years after filing if current credit is in good standing. Similar guidelines apply to individuals who have undergone foreclosure.
Although the FHA is part of the United States Department of Housing and Urban Development, the FHA pays for itself through profit. It makes money because it works through lenders to provide loans. A lender holds the loan, which is insured against default by the FHA, but the cost of this service is passed to the buyer by requiring mortgage insurance. There is an upfront charge of 1% plus monthly premiums for mortgage insurance that are due at closing. Typically, when the loan is paid down to 78% of the property's value, the mortgage insurance is no longer required.
The property associated with the loan must meet certain standards to qualify for an FHA loan. An appraisal typically includes analysis of the property compared to several other similar properties in the area as well as a thorough inspection of the property itself for any liabilities which might cause the property to be worth less than the comparable examples. An FHA appraiser must provide documentation of these findings before the lender and buyer can close the mortgage.
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