FHA loan requirements have been relaxed as part of the Federal government's Housing and Economic Recovery Act, 2008. The purpose of the act is to provide some relief for home owners affected by the housing finance crisis, and to help stabilise the property market overall.

Relaxing the FHA loan requirements will allow more FHA insured loans to be issued, and in some parts of the country, will allow FHA loans to be issued for higher value properties than was previously premitted.

If you are suffering from mortgage stress, you should see whether the new FHA loan requirements will allow you to qualify for an FHA insured mortgage.

FHA Loan Requirements Summary

1. Age - you must be above the minimum age required to sign a mortgage in your state. There is no maximum age limit.

2. Citizenship - you are not required to be a US citizen, but you must be a permanent resident of the USA who is permitted to work in the US.

3. Social Security Number - you will require a valid Social Security Number; a Tax ID number is not sufficient.

4. You must have a 3% down payment (this will go up to 3.5% as of September 1, when the new legislation comes into effect), and you must be able to finance the closing costs of the loan.

5. The property in question must be a residential dwelling suitable to house 1-4 families.

6. The value of the property cannot exceed the allowable maximum for your area and the type of dwelling.

7. You will need to meet the lender's qualification requirements for a mortgage. The requirements for FHA loans are generally more lenient than standard mortgage qualification requirements.

8. Credit Score - you do not need to have a good credit score to obtain an FHA loan. FHA lenders cannot reject a borrower because you have no credit history. If you have declared bankruptcy in the past, or has a foreclosure, there will be some additional requirements before you can qualify for an FHA loan. Basically, you must have your affairs in order.

9. Income - there is no minimum or maximum income requirement for an FHA loan.

10. Debt-To-Income Ratio - you can use up to 29% of your income towards housing, and up to 41% of your income on the combination of housing plus all other long-term debt.

11. Down Payment - you will need a 3% down payment, but this can be in the form of a grant or gift.

12. Closing Costs - you will need to be able to pay the closing costs of the FHA loan, which will be higher than a standard loan. Usually, you will need an additional 2.5% of the value of the property.

This legislation strengthens and modernizes the regulation of the housing government-sponsored enterprises involved with FHA loans - Fannie Mae and Freddie Mac (the enterprises) and the Federal Home Loan Banks (FHLBs or Banks). In addition, it creates a new program at FHA (Hope For home Owners) that will help at least 400,000 families save their homes from foreclosure by providing for new FHA loans after lenders take deep discounts.

Summary of the HOPE for Homeowners Act of 2008

The "HOPE for Homeowners Act of 2008" creates a new, temporary, voluntary program within FHA to back FHA-insured mortgages to borrowers at fisk of foreclosure. The new mortgages offered by FHA-approved lenders will refinance non-performing loans at a significant discount for owner-occupants at risk of losing their homes to foreclosure. In exchange, homeowners will share future appreciation in the value of their home with FHA.

1. Long-term affordability. New loans will be based on a family's ability to repay the loan, rather than the value of the home, ensuring affordability and sustainable homeownership. Of course, the original lender will be the loser in this deal, as the original mortgage was based on the value of the home.

2. No investor or lender bailout - wouldn't that put the cat among the political pidgeons! Only owner-occupiers may apply. Of course some investors are holding non-performing mortgages, but investors and/or lenders will have to take significant losses in order to benefit at all from any proceeds of the loans refinanced with government insurance. However, these losses would be less than the losses associated with foreclosure, so it is likely that some investors - and many lenders - will agree to the scheme in order to avoid the foreclosure process.

3. No windfall for borrowers. If you suddenly write down a $400,000 mortgage to $200,000, because that is all the borrower can afford, that is effectively handing $200,000 to the borrower. To offset this consequence, borrowers will share their new equity and future appreciation equally with FHA. Borrowers will also pay for the FHA insurance.

4. Voluntary participation. Because of the massive losses these refinancing deals will cause for mortgage holders, this can only be be a voluntary program. No lenders, servicers, or investors will be compelled to participate. Otherwise, there would be rioting on Wall Street! 5. Restore confidence, liquidity, and transparency. Credit markets are fearful and frozen at least in part because the free-fall in property prices means that banks and other financial institutions do not know what their subprime mortgages and related securities are worth. The uncertainty is forcing lenders to hoard capital and stop the lending necessary for economic growth. The government hopes this program will help restore confidence and get markets flowing again.

6. New Reduced Loan Amount. The size of the new FHA-insured loan will be lesser of the amount the borrower can afford to repay, as determined by the current affordability requirements of FHA; or, 90% of the current value of the home. As you can imagine, in some cases this is a deep discount on the previously appraised value of the home.

7. Loans must be 30-year, fixed rate loans. 8. Existing Subordinate Liens To Be Paid. Before participating in this program, all subordinate liens - second mortgages and other debts using the property as collateral - must be extinguished. This will have to be done through negotiation with the first lien holder. In other words, the holder of the first mortgage may be required to pay out second and subsequent mortgages, although in the circumstances, often at pennies on the dollar.

The new FHA loan requirementsnot only make attaining an FHA loan possible for thousands of home owners who were previously excluded from the program, they also expand the funds available to insure loans to qualified borrowers. In addition, the new temporary HOPE for Home Owners program offers the possibility to refinance to a much smaller mortgage. Such an opportunity only comes along once in a lifetime, so if you are suffering from mortgage stress, or have fallen into arrears with your mortgage, then you should immediately investigate whether you might now be eligiable for FHA-backed mortgage relief.

Online assessment to see if you meet FHA loan requirements.

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