What is an FHA Loan?
The Department of Housing and Urban Development (HUD) was created in
1965. HUD over sees the Federal Housing Administration, recognized commonly
as FHA. The FHA's essential duty is to administer government loans and to
set the FHA loan requirements for the government loan guarantee program.
Many first time home buyer's ask "What is an FHA Loan?" without ever
getting a clear concise answer, we'll give that to you here. The main
purpose of FHA is to allow buyer's who do not qualify for conventional
or "A" loans an opportunity for home ownership. Without the reduced
FHA
loan
requirements, millions of homeowners would not be able to participate in the
"American Dream". FHA gives lenders a government guarantee that as long as
they, "the lender", gave the loan in good faith and followed all FHA loan
requirements then the government will pay the lender back for losses due to
foreclosure, etc.
Buyers who might have some credit problems or in fact they just do
not have any of the traditional credit (car loans, credit cards, etc.)
might be able to obtaining FHA financing. Additionally, Federal Housing
Administration home loans are assumable, allowing any person who
qualifies, the ability to take over your mortgage without the extra cost
of getting a new mortgage. In addition, the lender or seller must pay
for part of the closing costs (called non-allowable costs) associated
with obtaining an FHA loan. The borrower on the other hand "is" allowed
to roll all allowable costs into their new mortgage loan making the
amount they need to close substantially lower.
Borrowers will find that FHA pmi (private mortgage insurance) is
lower
for an FHA loan versus a conventional loan with 3% down. Lastly, FHA loan
requirements often require less income to qualify as these loans can exceed
conventional debt ratios of 28/36% as their standard is 29/41%.
The #1 FHA program by popularity was created just for first time home
buyer's is called the 203(b). This is your common fixed rate loan for
between 1-4 family's who plan to owner occupy the property and only requires
a minimum down payment of 3% from the borrower(s). The 203b loan also
permits 100% of the money needed for closing to be a gift from a relative,
organization, non-profit or government agency. Whether the gift is a loan or
not, you just need a letter for the lender from the family member stating it
is a gift and does not need to be paid back.
Numerous individuals make the mistake of assuming FHA loans are only open
to first-time home buyers. This is just not true. FHA mortgages are
available to anyone, whether your buying your first or third home and can be
used to buy or refinance a home. If you are currently looking to refinancing
a home the current mortgage loan does NOT have to be a FHA loan.
The large disadvantage to FHA loans is that the FHA loan requirements
limit the size of the loan a borrower can obtain. For additional information
on FHA loan amounts in your area click here. Others might try to show you
that FHA upfront mortgage insurance premium (MIP) is a disadvantage, however
this amount makes just a very small increase in the borrower's month payment
and is partially refundable in certain cases. If you're still looking for
additional information on "what is an FHA loan" or FHA loan requirements
continue here.