The Federal Housing Administration (FHA) was established around the time of the Great Depression to help Americans buy homes. Today, the FHA continues to insure loans by offering low down payments and refinancing options with attractively high loan-to-value ratios.

Less than half of Americans could afford a home when the FHA loan program was first launched back in the 1930s. Since that time, the agency has made loans possible for about 40 million homeowners. The agency doesn't actually make loans, but instead, provides mortgage insurance to reassure lenders that their losses will be covered if a borrower defaults.

Because the insurance provides a financial safety net, banks and mortgage companies agree to provide loans with much lower down payments, and to refinance homes with higher than normal loan-to-value ratios. When you buy a home with an FHA-insured loan, for example, you can get loan approval with a down payment as low as three percent. If you need to refinance to get access to your equity in the form of spendable cash, most lenders in today's market will lend you 70 percent of what your home is worth. But with FHA refinancing, you can get as much as 95 percent.

How FHA insurance works
Homeowners pay for the FHA insurance through a combination of private mortgage insurance (PMI), and additional fees that are paid as an up-front insurance payment when the loan is originated. But like other PMI programs, FHA mortgage insurance premiums can be dropped from your monthly payments as soon as your mortgage balance falls to a level of 75 percent of the original loan amount of your home. To make it easier to finance a home, the FHA provides somewhat lenient payment terms and will often lend money to those with lower incomes, or less than perfect credit. The agency also offers guidance for those who need to improve their credit, and if you apply for one of its loans and fail to meet their credit requirements, it will refer you to a different kind of company-one that does authorized consumer credit counseling.

Double your pleasure
As part of the ongoing effort to stimulate the U.S. economy, the FHA was recently given the authority to raise the limits on its loans, with the upshot being that you can borrow nearly twice as much as before. By increasing the size of its loans, the FHA is in a better position to compete within today's higher-priced housing market as an affordable alternative for buying a home, or refinancing an existing mortgage.

An FHA-insured mortgage is usually a sensible option for someone who has less available cash. Those who can afford large down payments may find a more competitive deal through a conventional loan, like those backed by Fannie Mae or Freddie Mac. If you're thinking of buying or refinancing, have your mortgage broker or bank loan officer show you a side-by-side comparison between an FHA loan and other available mortgages.

By offering to cover part of the potential risk to lenders by insuring home loans under special programs, the FHA enables more Americans to realize the American Dream. Typically, for a conventional loan not backed by the FHA, a buyer can expect to make a down payment of up to 20 percent or more. FHA loans, on the other hand, require as little as three percent down. You can also use competitive FHA loans to refinance a mortgage.

Emergency stimulus package
During the past few years, inflated real estate prices put many homes out of the reach of those people for whom the FHA program was created to help. But now, Congress recently approved emergency stimulus legislation that temporarily raises the ceiling on FHA loans from $362, 790 to $729,750 in the highest-cost areas.

For several years, buyers essentially ignored the perks of FHA loans because the agency requires above average credit. Rather than bother with those rules, buyers passed them over, opting instead for subprimes and other low-documentation mortgages tailored to those with mediocre or poor credit. But times have changed, and the demand for FHA loans is steadily growing because, as the mortgage industry struggles, many other types of loans have gotten prohibitively expensive or scarce.

Banks adding fees
When the higher limits were announced, buyers breathed a collective sigh of relief, and headed off to talk to their local bankers about FHA mortgages. Unfortunately, however, many came away empty-handed-or at least lighter in the wallet-because banks are adding their own prohibitive fees, charges, and restrictions on FHA loans.

J.P. Morgan's home-mortgage unit, for instance, recently imposed new so-called "price adjustments" on FHA loans that are written for the new larger amounts. The adjustments can tack on an extra half point of interest to each loan, which can negate the savings for borrowers.

By paying an extra half point during the life of a loan, a homeowner can pay tens of thousands of dollars in additional interest. But what hurts many buyers even more is that, in the near term, as gasoline prices, groceries, and other household items are becoming more expensive, their monthly mortgage payments will be higher. Add a half point of interest, and you automatically add an extra $100 or more to the monthly payment at a time when homeowners are already strapped for cash.

Congressional hopes dim
Other lenders are following the lead and imposing their own fees. Mortgage brokers around the nation report, for instance, that while smaller FHA loans are available for under six percent, the bigger new "jumbo" FHA loans cost about seven percent. As a result, say many brokers, they aren't selling as Congress had hoped, and the only thing that they're stimulating is consumer frustration.

If you think home ownership is out of your reach, perhaps you haven't been introduced to the FHA. Thanks to some recent increases in loan limits, this division of the federal office of Housing and Urban Development is set up to be the prospective homebuyer's new best friend.

FHA loans are characterized by reduced eligibility requirements, and down payments as low as 3 percent. The federal government doesn't fund these loans; they make them available to borrowers by arranging for low-cost mortgage insurance. While borrowers are responsible for the mortgage insurance premiums, the upfront portion can be financed into the loan. To obtain an FHA loan, the prospective borrower must apply with an FHA-approved lender. Loan amounts are subject to stated limits, which vary by county and change periodically. Below is an overview of the most popular programs.

Mortgage insurance for standard purchase and refinance mortgages
The Section 203(b) program provides low-cost insurance for fixed-rate mortgages and refinances.
Low-cost mortgage insurance for adjustable-rate mortgages is available through the FHA's Section 251 program.
Condominium buyers can obtain mortgage insurance for 30-year mortgage loans under Section 234(c).
Insured rehabilitation mortgage
The 203(k) program allows for financing of a home purchase. plus the cost of necessary home repairs. Typically, a non-FHA loan won't finance repair costs until after those repairs have been completed. The FHA's program addresses this issue by establishing an escrow account from which the contractor will be paid. During the loan approval process, the borrower must provide a detailed scope of work, and cost estimates for the repair project.

Insured reverse mortgage
FHA reverse mortgages allow homeowners aged 62 and older to cash out the equity in their homes without obligating them to monthly debt repayments. The reverse mortgage isn't repaid until the homeowner sells the home or passes away.

Insured energy efficient mortgage (EEM)
The FHA's energy efficient mortgage program insures financing to pay for home energy improvements. To qualify, the borrower must be eligible for an FHA-backed loan in the amount of the purchase price. A home energy rating report determines how much additional financing is needed to cover the cost of the energy improvements.

Insured graduated payments mortgage (GPM)
A graduated payments mortgage is structured with low initial payments that increase over time; the FHA insures these mortgages under its Section 245 program. Exact loan structures vary, but borrowers have the option of having payments increase during the first five or 10 years of the mortgage loan.

Benefits of FHA mortgage
They help reduce the cash needed to purchase a home.
FHA mortgage insurance costs are paid by the homebuyer, but they end approximately five years after you buy your home, or when the FHA mortgage balance is 75 percent of the property's value.
They have flexible payment schedules and rules regarding required monthly income, allowing more borrowers to qualify.
If you don't have lots of cash to use for your down payment, an FHA loan can help you buy your home.
To qualify for an FHA loan, you'll need to have a good credit rating. Before applying for one, work to improve your overall credit score. If you have had credit problems in the past, the FHA recommends a consumer credit counseling program to avoid being denied a loan.

Qualifying for an FHA loan
The FHA asks for a great deal of information on your loan application. For example, you'll need to provide two years worth of:

All addresses where you have lived.
Your employers' names and addresses.
W-2 tax forms.
IRS tax returns.
You'll also need to provide your monthly gross income.

Gather all paperwork and documentation before you begin your application. This way, you'll have everything handy and available to share. The FHA asks that veterans submit the DD Form 214-or official Armed Forces discharge paperwork-along with the FHA loan application paperwork. You can request the form online from the Department of Defense.

Never has this kind of lender reassurance been more critical than it is in today's crisis-laden credit environment. If you qualify for an FHA loan, it may save you lots of money, and help you buy a home that you might otherwise not be able to finance with an ordinary loan