If you want to buy a home, but you do not have a stellar credit rating or a lot of money saved up for a down payment and closing costs, you might want to consider a Federal Housing Administration (FHA) loan.

FHA Loan Information

The FHA, part of the United States Department of Housing and Urban Development (HUD), was created in 1934 and is the largest government insurer of mortgages in the world. By providing this insurance, the FHA makes it possible for FHA-approved lenders to offer you a better deal on a mortgage. By guaranteeing that a lender does not have to write off a loan in the event of a borrower defaulting on their obligation, the FHA makes it possible for lenders to extend larger mortgages to homebuyers. In most cases, an FHA-guaranteed loan makes it easier for you to qualify for a mortgage and purchase a home with a lower-than-usual down payment.

FHA Loan Advantages

FHA loans can be a good deal for first-time homebuyers.

-      The down payment can be as low as 3 percent of the purchase price.

-      The bulk of closing costs can be included in the loan.

-    Money for the down payment can come from a family member, charitable organization, or employer.

FHA loans also offer other advantages.

- In many cases, you can qualify for better interest rates because the federal government insures the loans.

- If you experience financial difficulties after the purchase of your home, an FHA loan provides several options that can help you remain in your home and avoid foreclosure.

- If you have found a fixer-upper that you would like to purchase, the FHA allows you to include the cost of the home and needed repairs in one loan.

- If you want to make your home more energy efficient, you can include the costs of needed improvements in an FHA Energy-Efficient Mortgage.

- If you already own your own home, the FHA allows you to combine the cost of remodeling or repairing your home and refinance what you already owe on the property in one loan.

- FHA-approved loans do not penalize you with additional fees if you pay off the loan earlier than the stated time frame.

Unlike many first-time homebuyer programs, there are no income limits associated with an FHA loan, so nearly anyone can qualify for one. Nevertheless, there are strict limits on how much you can borrow with an FHA loan. For some people, the available loan amount may not be large enough. Generally speaking, it is only possible to secure a small mortgage loan relative to home prices in your location. To qualify for an FHA loan, you also must have acceptable debt-to-income ratios. While you do not have to have stellar credit to qualify for an FHA loan, you must have decent credit.

FHA Loan Qualifications

According to the basic guidelines, to qualify for an FHA loan, you must:

• Demonstrate two years of steady employment—preferably with the same employer.

• Be able show that your income has remained the same or has steadily increased for the past two years.

• Have less than two 30-day late payments on your credit report during the last two years.

• Show a good credit history for at least two years following a bankruptcy or foreclosure.

• Demonstrate that your mortgage payment will be about 30 percent of your gross income.

If you meet most of the above requirements, you likely will be able to qualify for an FHA loan. The FHA Web site also has some other tools that can help you determine whether you meet the requirements for a loan, including an FHA loan prequalification request. You also can apply for an FHA loan online.

FHA Loan Application

Before applying for an FHA loan, it is essential to collect the right documentation—especially since the approval of your FHA loan rests entirely on the information contained in these documents. While there are some variations among lenders, in general you will be expected to supply information about your:

- Employment history for the past two years

- Wage information

- Financial investments

- Savings

- Credit information

- Basic personal information like your Social Security Number

You can access the full list of required documents on the FHA Web site, but the following list includes some of the documents that you will want to obtain before filling out the loan application:

• Tax returns with all schedules for the past two years

• W-2s and 1099s for the past two years

• Your most recent pay stubs for a one-month period

• If you are self-employed, three years' worth of tax returns and a year-to-date profit and loss statement

• Recent statements from all retirement funds, stocks, and other investments

• The last three months' worth of bank statements

• Recent statements for all of your credit cards

• Contact information for your landlord, or one year's worth of canceled rent checks

• Copy of your drivers license

• Copy of your Social Security card

Additional Resources

- Federal Housing Administration:                                                     www.fha.gov

- U.S. Department of Housing and Urban Development:                     http://www.hud.gov

- Federal Deposit Insurance Corporation:                                           http://www.fdic.gov