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By BankingMyWay.com Staff
The ongoing credit crunch has made it more difficult for borrowers to qualify for a standard mortgage. Lending standards have tightened significantly over the last 18 months. Even those who have a slightly less than stellar credit rating and/or minimal down payments are having a tough time finding a loan in the mortgage market.

However, the credit crisis has helped bring the long-lived FHA-insured loans back into fashion. The FHA, or Federal Housing Administration, is a government agency that provides mortgage insurance for agency-approved loans originated by lenders. If a borrower defaults on a FHA-insured mortgage, the lender is protected.

FHA-insured loans used to be quite popular before the subprime lending boom, which yielded lower interest rates and exotic mortgage products. Now that the subprime industry has collapsed, FHA-insured loans are rapidly gaining popularity.

FHA-insured loans offer many of the same benefits of subprime loans, including low down payment requirements and easier qualification. The loans also only require a 3.5% down payment, which can come as a gift from a family member or elsewhere. The FHA also approves loans for those who have blemishes on their credit reports. And because the government insures the loan, lenders are more willing to work with borrowers to qualify.

The FHA does not originate loans itself.  FHA-insured loans can only be obtained through approved lenders. The U.S. Department of Housing and Urban Development (HUD) offers a "Lender List" search tool to help you find approved lenders in your area.

To get an FHA-insured loan, you have to fit within certain parameters. One of the main factor lenders look at is debt-to-income ratio.  Generally, the agency does not approve loans that result in monthly mortgage payments of more than 31% of the borrower’s gross income. Credit history is rarely an issue, but those who have scores of less than 500 may be required to put 10% down on the loan. FHA-insured loans do not have a maximum income requirement, but there is a limit to how much can be borrowed. Currently, that limit is $271,500 for most parts of the country, but is higher for more expensive regions like Hawaii.

Even though the down payment is significantly reduced, borrowers do have to pay an upfront fee for the mortgage insurance the government provides. This fee is typically 1.5% of the loan amount. An annual fee of 0.5% is also charged as an insurance premium. Those who have the credit rating and down payment to qualify for a conventional mortgage will likely see some savings over an FHA-insured mortgage, mainly because of the added insurance premium.

Having a government-backed mortgage does offer an additional benefit, however. The FHA has procedures to prevent foreclosure and help keep borrowers in their homes. The FHA works with borrowers who have fallen on tough times by postponing payments and doing partial payouts from the insurance fund financed by the upfront fee and annual premiums. In the current housing environment, this added benefit is attractive for borrowers who don’t have an adequate emergency fund and may face a layoff in the future.

— For more ways to save, spend, invest and borrow, visit MainStreet.com.