There are several reasons why a borrower would want to consider applying for an FHA loan. You may want to buy a home, but you don’t have a down payment that a conventional mortgage would require. You would like to refinance your property, but you don’t have the required amount of equity in your home, or you might have had some credit issues in the past that has given you an unhealthy credit score.

What is the Federal Housing Administration?

The Federal Housing Administration, commonly known as “FHA,” is part of the U.S. Department of Housing and Urban Development (HUD.) The program was created for low income individuals, or families that might need a little help in the homeownership process.  FHA does not fund loans; they insure residential mortgages for FHA approved lenders in case a borrower defaults. This allows borrowers to qualify with lower interest rates and be subject to less strict underwriting guidelines.

FHA Mortgage Requirements for Purchases and Refinances

• FHA provides insured mortgages for single family homes, multiunit homes, as well as condominiums
• FHA loan maximum can vary per county; however, $521,250 is the average for most counties. You can check what your county’s maximum loan amount is here
• As of late 2009, the minimum down payment has risen from 3% to 3.5%
• You must have two years of steady income and your DTI (debt to income) cannot exceed 29%. Meaning, if you have a monthly income of $3,000, your mortgage payment cannot exceed $870, which is 29% of your monthly income
• The borrower cannot have a credit score under 580, or 620 depending on the lender’s guidelines
• The first mortgage to be refinanced must already be FHA insured and current
• The new FHA refinance must reduce the borrower’s monthly principal and interest rates with a cash-out no greater than 85% loan to the value of the home
• A bankruptcy must have been discharged for a minimum of 2 years and has not had a foreclosure for at least 3 with unblemished credit since
• Minor collection accounts do not need to be paid in full in order to qualify for the loan. Judgments, on the other hand, must be paid in full.

These are the latest FHA mortgage requirements from HUD as of  the changes that were made in late 2009. If anything should change in the mean time, please let me know and I will update the requirements immediately.

The mortgage interest tax deduction provides homeowners the ability to deduct the interest they paid on their mortgage(s) from their taxable income they earned for the tax year in question. Your primary residence isn’t the only mortgage interest deduction you can take advantage of. If you have a mortgaged second home, that interest paid over the course of a year for that mortgage can be deducted as well.

Countries such as the United State, Netherlands, and Switzerland are the only developed countries that offer a full interest deduction. Ireland, Sweden and Belgium offer a mortgage interest tax deduction, but only a small fraction.

There are many opinions on whether the tax deduction positively or negatively affects the United States economy. It has been argued that the deduction gives an incentive to purchase a home, which in return fuels the economy. While the opposition argues that the deduction artificially inflates home prices. In my opinion, regardless if the tax deduction positively or negatively affects our economy, if the deduction was taken away, home prices would plummet at least 15% percent.

Mortgage Interest Deduction Limit

There are two different types of mortgage debt called Home Acquisition Debt and Home Equity Debt:

Home Acquisition Debt: The IRS states that the most mortgage interest you can write off for Home Acquisition Debt is $1,000,000 and this goes for the first and the second homes as long as it’s used to acquire, construct, or substantially improve a home.

Home Equity Debt: You may also deduct up to $100,000 on your second mortgage as well, which is called Home Equity Debt as long as it’s NOT used to acquire, construct, or substantially improve a qualified home. However, you may not deduct over $100,000 for each mortgaged property that you own. In other words, even if you own multiple residences, you still can only deduct up to $100,000 per year.

Mortgage Interest Deduction Phase Out

If you gross more than $166,000, your mortgage interest deduction begins to get phased out Every $100 you earn over $166,800, you will lose three dollars of itemized deductions, or 33.3% up to a maximum loss of 80% of your itemized deductions.