FHA Basics

• FHA loans are an alternative to conventional loans for buyers that do not meet the typical 20 percent down payment requirements of conventional lenders. FHA loans usually require just a 3.5 percent minimum down payment and a moderate credit score. FHA loans are available in every county and are based on the qualifications of the borrower and not based on the home. Along with meeting the basic down payment requirements and credit qualifications, the borrower has to pay for FHA mortgage insurance.
  
  

Debt Ratios

• Among the common requirements for FHA financing are mortgage-to-income and debt-to-income ratios below 29 percent and 41 percent, respectively. This means that your mortgage payment must fall below 29 percent of your gross monthly income. Your total debt obligations, including home, auto and personal loans must fall below 41 percent of your gross monthly income. These limits are slightly higher than the 28 and 36 percent ratios used as guidelines for conventional loans.
  
  

Loan Limits

• To buy a home with FHA financing, you must also stay within maximum loan amount guidelines. Maximum loans vary by state and county and are based on property values in each respective market. The lowest maximum loan amount for a one-unit residential property as of this publication is $271,050, according to the HUD website. Limits are posted for one- to four-unit properties on the HUD site and are searchable by state and county.
  
  

Mortgage Insurance

• A main requirement of FHA mortgage financing relative to conventional loans is FHA mortgage insurance. This is insurance that protects the lender in the event you default on your loan. This requirement is what motivates lenders to seek FHA certification to offer such loans. FHA insurance usually includes an upfront insurance premium of 1 percent of the loan amount plus monthly premium installments toward an annual premium of 1 to 1.5 percent of loan balance.