If you have little or no money for a down payment, iffy credit and lots of bills, an FHA loan could be what you need to buy a home.

The Federal Housing Administration, a part of the Department of Housing and Urban Development, was created 70 years ago to help first-time buyers, especially low-to-moderate-income families and minorities, get the home financing they need.

The amount you can borrow, and the FHA will guarantee, has been substantially increased, allowing more borrowers to take advantage of these loans.

The new limits range from $271,050 for single-family homes in low-cost areas to $729,750 in high-cost cities such as New York and San Francisco. Limits are determined by figuring 115% of an area's median home price.

That's a big improvement over the old limits of $200,160 to $362,790 -- a restriction that made FHA loans inadequate throughout most of California and the Northeast.

Here's where to find the new FHA loan limits in your area.

The higher limits also offer homeowners who want to refinance out of expensive ARMs a way to land a competitive rate.

You can apply for an FHA-backed loan from most banks and mortgage companies. Here's where to find FHA-approved lenders in your area.

The FHA guarantees repayment, so the lender knows it will not lose money on the deal. That allows the bank or mortgage company to offer competitive rates on a loan that's easier to qualify for than a conventional home loan.

Here are the ways you might benefit from an FHA-guaranteed loan:

Benefit 1. You don't need a big down payment, and your lender can help you get it.

An FHA mortgage requires a 3% down payment -- that's $30 for every $1,000 you borrow.

Don't have it? No problem. It can be a gift from a relative, friend or an organization that provides financial assistance.

The FHA works with state and local programs that extend help with down payments, closing costs and low-rate loans. Your lender will be glad to explain how these work.

One financing option no longer available is the down payment assistance program (DAP), which provided buyers with no-strings money for down payments and closing costs. However, Congress voted to abolish them as of Oct. 1, 2008, because of the high rate of foreclosures that resulted from these loans.

Benefit 2. Your credit doesn't have to be perfect.

Your credit score doesn't matter, because the FHA doesn't use it to determine eligibility or your interest rate.

More than 22 factors go into calculating your credit score, including how much credit you have, how often you apply for credit and how much available credit you use. The FHA doesn't care about that when determining whether or not you'll get a loan.

There are two key elements that go a long way toward determining whether you get a loan: a two-year history of on-time bill payments and a record of two years of steady employment, although exceptions are made. The FHA will overlook minor lapses on your credit history if there's a reasonable excuse such as losing a job or serious illness. But your bill-paying prowess is a critical factor for every application.

In the end, the FHA does not have a strict set of rules that determines who gets a mortgage and who doesn't. An underwriter at the bank who knows all of the rules and regulations governing FHA lending practices uses a computer program to analyze your finances and make the call.

There are things the FHA will not overlook. If you've:

• Declared bankruptcy, you must wait two years from the date of discharge and have re-established good credit before you can apply.
• Lost a home through foreclosure, you must wait three years and have a clean credit history during that time.

Benefit 3. You can have more debt.

Your debt-to-income ratio can be considerably higher for an FHA loan than for a conventional loan. And even the FHA limits have been expanded to open home ownership to more people.

To find out where you stand, add your total mortgage payment (principal, interest, taxes, hazard insurance, mortgage insurance and homeowner's dues, if they apply) to regular monthly obligations, such as credit card debt, auto loans, student loans or court-ordered payments like child support or alimony. (Utilities, food, clothing and so forth are not factored in.) Then divide this total by your monthly income, which is the before-tax income of those making the payments.

You can qualify for an FHA loan if your monthly debt payments are no more than 43% of your income. For most conventional loans, the payments can't exceed 36%.

Or you can figure your mortgage payment as a percentage of your pretax income, which should be no more than 31%. These percentages can be stretched if other numbers look good.

Benefit 4. There are many different types of mortgages from which to choose.

The FHA offers 15- or 30-year fixed-rate loans and one-year, three-year, five-year, seven-year and 10-year adjustable-rate mortgages.

The FHA also offers special programs that require very low payments during the first couple of years of the mortgage -- the Growing Equity Mortgage and the Graduated Mortgage Payment programs.

Growing Equity Mortgages, often referred to as GEMs, allow homeowners to make small payments during the first few years and then to increase monthly payments over time.

The Graduated Mortgage Payment program is available to people who have good reason to expect their incomes will grow over the first five to 10 years of the loan, allowing them to buy a home and move in before they are able to make full payments. Payments then increase during the first 10 years of the loan.

Benefit 5. Rates are competitive.

The interest rate will depend on your credit history, with the best rates given to those with the best record of paying their bills and earning a steady income.

In general, you can expect an FHA loan will cost only about one-eighth of a percentage point more than any conventional loan for which you might qualify.

The big disadvantage to FHA loans is that you must buy costly mortgage insurance if you put less than 20% down on your house -- and most buyers with FHA mortgages do. You'd have to buy it if you took out a conventional mortgage, too.

But the FHA charges an up-front insurance premium of 1.75% of your mortgage amount. That replaces the risk-based premiums beginning Oct. 1. While that amount can be added to your loan amount, it's still an extra charge.

The annual cost is about the same as private mortgage insurance for conventional loans -- 0.5% or 0.55%. If your down payment is less than 5% on a 30-year fixed-rate mortgage, it will cost you 0.55% annually. A down payment of 5% or more will reduce your annual cost to 0.5%. This cost is usually broken into 12 monthly payments that are added into your mortgage payment.

But you can look at it another way. If you got a conventional loan, you would have to put down 5% of your own money. So the maximum 5% you'd need for the FHA purchase is not all that much more, and it can be a gift.

You must continue this coverage until you've paid off 22% of the principal, which takes roughly 12 years with a 6% interest rate. Conventional loans allow you to drop mortgage insurance as soon as you hold 20% of your home's equity -- the difference between what the home is worth and how much you owe on your loan. That can include any appreciation in your home's value, not just paying down the debt.

Despite those drawbacks, FHA loans have helped thousands of people buy their first homes. Could one help you?

By Carolyn Siegel

Interest.com Associate Editor

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