A Federal Housing Administration (FHA) loan is a mortgage loan that is insured by the FHA. In this type of loan, the federal government is what insures loans for FHA-approved lenders so that there can be a reduction in their risk of loss in case a borrower defaults on the mortgage payment.
FHA home loans are regarded as the best option for homeowners and home buyers who are looking to purchase or refinance. These loans are specifically useful to borrowers especially those that cannot make a big down payment, whose credit is not great, who want low monthly payments, and those who qualifying for a conventional loan is difficult.
When was it created?
FHA was created by the Congress in 1934 to become part of the Department of Housing and Urban Development (HUD) later on in 1965. It is important to understand that FHA is not a lender. However, it is the largest insurer of mortgages across the globe.
Who is it for?
FHA has the responsibility of insuring lenders against losses as a result of property owners defaulting on their mortgage loan. It also insures single and multifamily homes including manufactured homes and hospitals. The FHA is the only government agency that doesn’t demand any money from the taxpayers. It operates entirely from the proceeds from its mortgage insurance which is initially part of the mortgage payment.
First time home buyers, especially those who might otherwise not qualify for a home loan are allowed by this program to obtain one because the risk is removed from the lender by FHA who insures the loan. The FHA home loans have become cool again, with the recent sub-prime lending collapse, as mortgage lenders and brokers are flocking to the latest FHA loan programs.
Since the FHA has been around for a long time, many innovative programs have been established to help different segments of the population to realize the dream of home ownership. The misconception spread out is that FHA home loans are only meant for first time home buyers. That is far from the truth. You can only have one FHA loan at a time regardless of whether it is your second home or fifth. The area-by-area or county-by-county basis is what determines the mortgage limits for FHA home loans.
Finding an FHA Loan
You may be wondering where you find an FHA loan and the fact of the matter is that you probably will not have to look far. If you open your local yellow pages you will likely find page after page of mortgage broker or lender listings and you simply need to call a few and see what they can do for you. One of your first questions should be if they originate FHA type loans, because you may be surprised to learn that not all lenders are willing to do this type of loan, and that is their prerogative.
If you are a bit hesitant about doing work with just any mortgage lender or broker there are a couple of different places that you can go to get some more personal information. First, you may want to ask your friends and family members which mortgage brokers they did business with. This is a good idea because your friends are likely to give you a lot of great information and put you in contact that can really help you. In addition, your friends and family members may tell you people or businesses that you want to stay away from, which can save you time, money, and stress.
If you don’t have any friends that can help you with finding a broker that will get you the FHA loan that you need, you may want to talk to your realtor. Many times realtors have great working relationships with a variety of brokers and when you ask your realtor they will be able to put you in contact with the people that they have had the best experiences with, which may mean that you may save some time and stress by limiting how much you have to shop around.
Pros of an FHA Loan
FHA loans are beneficial to homebuyers. This is perhaps the reason why they are so popular. Its advantages include:
Quick qualification: what FHA does is to insure the mortgage and not directly lend money to home buyers. Lenders have the incentive to give better loan terms and make it easier for a home buyer to get qualified.
You don’t need great credit: You need to have pretty darn credit to qualify for a conventional loan in today’s housing market. However, you can qualify for a FHA Home Loan with less than perfect credit scores with as low as 585 credit score. However, most lenders would prefer a credit score of at least 620 or above. You also have a better chance of getting a mortgage with the FHA Home Loan Program than a conventional loan if you have a bankruptcy in the past you have a better.
Low Down Payment: This is regarded as the best advantage to a FHA Loan Financing. You will only need at least 3.5% down payment versus 20% or more if you are looking for conventional loans. You don’t need any down payments. This can come from your employer, charitable organization or family members. Other conventional loans can’t allow this.
If you buy a HUD foreclosed home, you currently need $100 for a down payment. You can get more information on the HUD $100 Down Payment Incentive by simply doing an online search.
Costs Less: The fact that FHA home loans are insured by the Federal government makes them the mortgage loans with a very competitive interest rates. If you want to see the full benefits of FHA, you only need to compare their rates with rates of conventional loans.
Purchasing new homes: It is very hard to get financing for manufactured homes with conventional financing. However, FHA loans can be used not only to purchase existing single family homes but also new construction homes, 1-4 family homes, and manufactured homes.
Disadvantages of FHA Loans
Of course, FHA loans include drawbacks and aren’t for everybody. The FHA sets loan limits in order to continue to serve low-to moderate-income families. When you consider these loan cap amounts, you might end up having to apply for a conventional or jumbo loan to buy the house.
The home you buy must also become your primary address. FHAs are not intended for use by people buying second homes or investment properties.