FHA Loan Basics

• FHA loans are an alternative for home financing that enables people that cannot afford the 20 percent down payment typically required on a home purchase by conventional lenders. The FHA loan program started in 1934, and it has functioned as part of the United States Department of Housing and Urban Development (HUD) since 1965. Originally designed as a way for first-time home buyers to get financed, FHA provides many home loans each year to buyers of all types, including investors seeking a low capital investment.
  
  

FHA Loan Limits

• FHA loan limits are adjusted periodically to account for changes in costs of living. You can search the HUD database to find the maximum loan by state and county, for properties ranging from single-family dwellings to four-unit residences. The maximum loan amount for many counties, as of April 2011, is $271,050. This is the loan limit for most typically priced home markets. Some markets with higher home prices have higher limits. As an example, FHA.com shows a one-unit limit of $271,050 for all but a handful counties in Indiana. Similarly, most counties in Indiana have a lone limit of $521,250 for four-unit residences.
  
  

Other Loan Limit Guidelines

• FHA borrowers must not only buy a home within the maximum loan limit, but they also must not exceed FHA debt ratio limits. FHA loans only allow for a debt-to-income ratio up to 41 percent. This means your mortgage, car loan payments and other personal loan payments cannot exceed 41 percent of your gross monthly income. This is slightly higher than the 36 percent maximum typically used by conventional lenders because of FHA's required mortgage insurance. Your maximum mortgage-to-income ratio with FHA is 29 percent.
  
  

Mortgage Insurance

• Mortgage insurance is the financial instrument that protects the lender's investment in financing purchases for riskier buyers. Mortgage insurance usually includes an upfront fee at closing and around one-half to 1 percent of your loan balance each month. Your mortgage insurance fee is typically included with your monthly loan installment.