Included in the Department of Housing and Urban Development (HUD), the Federal Housing Administration (FHA) insures loans offered by participating lenders. The FHA’s favorite 203(b) mortgage product provides banks with a guarantee: when a homeowner defaults, the federal government pays off his loan balance. To qualify for an FHA loan, properties need to meet criteria set by HUD.
The FHA insures one- to four-unit detached and semidetached dwellings in addition to townhouses, row houses and units in certain condominium projects. The FHA won’t cover several kinds of properties, including commercial institutions, motels and hotels and fraternity or sorority houses, based on HUD’s”Mortgage Credit Analysis for Mortgage Insurance on One- to Four-Unit Mortgage Loans” document. According to HUD data, the FHA favors single-family dwellings. As of July 2010, the FHA counts 6.1 million single-family homes and 13,000 multifamily dwellings in its own stable.
Generally the FHA won’t cover loans on investor-owned properties. In most cases, to be eligible for an FHA loan a borrower must occupy the property as her principal residence. Homeowners need to set occupancy for a period of one year. The FHA does not typically allow an individual to hold more than a FHA loan at a time, though there are a number of exceptions. For instance, if a homeowner relocates or experiences an increase in household size, FHA lenders may approve another FHA mortgage while allowing the borrower to maintain the original home. HUD prohibits the use of FHA-insured loans for secondary residences intended for recreational use. By way of instance, a borrower can’t use an FHA mortgage for a vacation home. The FHA will cover loans on secondary residences acquired for seasonal labour, work-related relocation or other purposes not associated with recreational use of the property when there is a lack of affordable rental units in the target area.
The FHA insures mortgages only up to a certain size. HUD publishes a database which provides updated mortgage limits by place. Normally, the more expensive the housing market, the higher the FHA mortgage threshold. For example, as of February 2009 the maximum FHA mortgage for a single-family house in San Francisco is $729,750. HUD points out, however, that in costly areas lenders can increase this figure to either 95 percent of the area’s median single-family house value or 87 percent of the limitation set by Freddie Mac, whichever is lower.