Federal Housing Administration (FHA) loans require down payments, which can be as low as 3.5% of the total purchase price of a home. The FHA loans program has been helping U.S. individuals and families to become homeowners since 1934. Because the U.S. government provides insurance for FHA loans, financial institutions are willing to lower their income and asset selection criteria, which helps low-income families qualify for mortgages.

FHA Loan Program

Banks and other lending institutions issue FHA loans, and the U.S. government insures these loans. This ensures that if a borrower defaults, the U.S. government will cover the remaining balance on an outstanding loan. In return, the U.S. government requires borrowers to enroll in a mortgage insurance program. Under this program, individuals must pay upfront and monthly mortgage insurance premiums to compensate the U.S. government for taking a risk of loan losses.

FHA Loans Features

Because of the presence of U.S. government insurance, lenders are willing to lower their income and assets qualifying thresholds and demand smaller interest rates and smaller down payments. Also, FHA loans have lower closing costs, since a lender does not have to perform certain credit assessment procedures due to the availability of government insurance.

FHA loans have maximum amounts that vary by county. The U.S. Department of Housing and Urban Development (HUD) maintains a database where individuals can check FHA mortgage limits. Also, there is no maximum income or earning limitation on FHA loans. However, banks still use minimum credit scores to assess the creditworthiness of an applicant.