FHA Financing Help

Benefits

Three main benefits of using an FHA loan versus getting a mortgage with a conventional lender are low down payments, low closing costs and easy credit qualification, according to the HUD website. These benefits are based on the fact that FHA loans are insured by the government, which offsets the risk to the lenders of providing loans to less-qualified buyers. In essence, FHA loans provide opportunities for people to buy homes when they otherwise could not.

While the financial requirements are less stringent than they are going through a conventional mortgage lender, you have to meet certain parameters to qualify. A main difference with an FHA loan is the minimum down payment requirement of just 3.5 percent of the purchase price of the home. This is significantly less than the 20 percent required by most conventional lenders. Another difference is more flexible income-to-debt ratios. Whereas conventional lenders follow a 36 percent maximum debt-to-income ratio, FHA allows for up to 41 percent of your income to include debt obligations with a prospective mortgage, according to the FHA website. Your monthly mortgage payment under an FHA loan cannot exceed 29 percent of your income, compared to 28 percent for conventional loans.

Another distinct requirement for obtaining an FHA loan is that you have to carry mortgage insurance. This is also common to most loans where you make a down payment less than 20 percent of the home's value. Mortgage insurance covers the risk to the lender for financing your purchase. Homeowners must pay for this as part of their monthly mortgage payment until building up at least 20 percent equity in the home.

Government-backed home loan programs like those offered by the FHA are intended to help stimulate economic growth by encouraging lenders to help buyers buy homes. FHA loans are an important contributor to economic growth, especially with regard to the real estate market. By creating a larger pool of potential home buyers, the FHA program improves the supply in the real estate market and helps minimize excessive inventory of foreclosed and unwanted properties.