With low down-payment requirements, competitive rates, and less stringent credit score requirements, more home buyers are choosing mortgages insured by the Federal Housing Administration (FHA).  Mortgages insured by the FHA 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 targeted to low- and moderate-income borrowers, but there are not any income restrictions.  However, these loans do restrict the amount that can be borrowed.  In high-cost areas, such as 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 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.  The number of authorized FHA lenders has soared by 500 percent over the past two years.