What is an FHA Loan?




Whether you’re a first-time homebuyer, or need to refinance, an FHA loan usually comes up on the docket as an option. But what, precisely, is an FHA loan, and is it the best course of action for your financial circumstances? How do you know if you qualify? Here is a quick guide to what an FHA loan does, and how to judge if it’s right for you.

What is an FHA loan?

Well, let’s start from the beginning. The FHA, or Federal Housing Administration, was created by the Housing Act of 1934, during the Great Depression. At this time, foreclosures and loan defaults had risen sharply, and so the FHA was created to provide mortgage insurance on loans originated by lenders, backing them financially in the event that the borrowers either defaulted on the loan, or did not otherwise adhere to the terms and conditions set forth by the lenders.

As a result, it has allowed lower-to-middle income Americans to borrow money for the purchase of a home that they would not otherwise be able to afford, allowing first-time homebuyers to put down as little as 3.5% of the purchase price. To obtain mortgage insurance from the Federal Housing Administration, a mortgage insurance premium (MIP) equal to 1 percent of the loan amount at closing is required, and is usually funded by the lender and paid to the FHA on the borrower’s behalf. You must also be sure to find an FHA-approved lender.

It is important to know that mortgage insurance is also required on most conventional loans if the borrower’s down payment is less than 20% of the purchase price or appraised value of the home. This private mortgage insurance may be more or less expensive than the FHA’s mortgage insurance, and is supplied by a financial institution, rather than the government.  The FHA chiefly assists people who cannot afford a conventional down payment, or otherwise do not qualify for private mortgage insurance.

Why choose an FHA loan?

The FHA offers competitive interest rates, smaller down payments, and low closing costs. Also, if the borrower does not have an established credit history, they can be considered by the lender based on the payment of rent, utility bills, auto insurance premiums, etc. Further, a financial gift from a family member, employer, or charitable organization can be used toward the down payment. Finally, and most importantly for many, a minimum credit score is not required, though some lenders expect a score of at least 580.

Who qualifies for an FHA loan?

First off, you have to be able to put at least 3.5% of the purchase price down. This money can come from a family member, charity or employer as a gift. In addition the borrower must:

  • Have a valid Social Security number.
  • Have proof of U.S. citizenship or evidence of legal permanent residency or eligibility to work in the U.S.
  • Be a legal U.S. resident.
  • Be old enough to sign a mortgage in the borrower’s home state.
  • Be purchasing a 1-4 unit property.

Who should consider an FHA loan?

If you are a first-time homebuyer, an FHA loan can be especially appealing. Further, if you find yourself without enough money for a down payment and closing costs, have imperfect credit, or may otherwise have worry that they may not qualify for a loan should certainly give some consideration to this option. Also, if you want to maintain the lowest monthly payment possible, or are concerned about possible monthly payment increases, an FHA-backed loan can be ideal. It is also good to know that if you are, in fact, a lower-risk borrower (less likely to default because, say, you have a stronger credit history), you will be charged less than someone who is higher-risk.  So in addition to federal aid, you will be somewhat rewarded for a good credit history (something of a “good faith” reward).

The extras: what else can be included with an FHA-backed loan?

Manufactured and mobile homes. The FHA also provides financing for mobile homes and factory-built housing.

Fixer-uppers. If you want to buy a house that perhaps needs some extra attention, the FHA has a loan option that lets you to buy a home, fix it up, with all expenses included in one loan. Likewise, if you want to make some changes to a home you own already, you can refinance what you owe and add the cost of repairs.

Going green. You can include the costs of energy improvements into an FHA Energy-Efficient Mortgage.

Reverse mortgages for seniors: If you are 62 or older, own it outright, or have a low loan balance, an FHA Reverse Mortgage lets you convert a portion of your equity into cash.





You must be logged in to post a comment Login