With low down-payments, competitive rates, and less stringent credit score requirements, many more home buyers are choosing mortgages that are insured by the Federal Housing Administration (FHA).  Mortgages insured by the FHA currently account for 20 percent of the total dollar volume in home loans – up from just 3 percent in 2006.

Some benefits to FHA loans include: a better loan modification program; ability to easily and often less expensively refinance; low rates; and acceptance of borrowers with credit scores as low as 620.

FHA loans are especially attractive for homebuyers with steady incomes who cannot scrape together a 20% down payment because FHA lenders will finance up to 96.5% of the home price.

FHA have historically been targeted to low- and moderate-income borrowers, but there have never been any income restrictions.  These loans do restrict the amount that can be borrowed.  In high-cost areas, such as San Jose California, the maximum amount that a mortgage applicant can borrower is $729,750.

Additionally, borrowers must pay an up-front insurance premium totaling 1.75 percent of the loan, which goes into FHA’s fund for repaying lenders if borrowers default.  This is in addition to any other usual closing costs.

In previous years, few lenders would originate FHA loans due to strict qualifications. That all changed a few years ago when the Dept. of Housing and Urban Development (HUD), which oversees the FHA, reworked its guidelines.  Now the number of authorized FHA lenders has soared by 500% over the past two years.