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What is FHA?
FHA stands for Federal Housing Administration. FHA is a part of HUD, the Housing and Urban Development. FHA was created by the government as part of the National Housing Act of 1934 in order to improve housing standards, housing conditions, and to provide a home financing system by insuring mortgage loans. The FHA home loan program has helped millions of buyers obtain affordable financing with great terms in order to enable them to buy their homes.
Today, with low FHA interest rates and favorable terms such as loan down payments, FHA loans are a great way for first time home buyers to get into the housing market and purchase their dream home.
How Does FHA Work?
The Federal Housing Administration (FHA) is part of the Department of Housing and Urban Development (HUD). HUD is in charge of administration of various single family mortgage insurance programs. HUD does not give loans. The loan programs are operated through FHA-approved lending institutions. The lenders fund the loans which HUD then insures. If a borrower defaults, FHA will pay off the entire loan balance to the lender. FHA offsets the costs of this by charging borrowers an upfront fee mortgage insurance fee of 1.75% as well as a small monthly mortgage insurance fee.
FHA Loans Features and Benefits
- Much easier to qualify for than conventional loans
- Lower down payment requirements than conventional loans
- Cannot exceed statutory loan limits (check with your mortgage broker requiring loan limits in your area)
- 3.5% minimum down payment required (which can be a gift)
- Minimum 620 credit scores for most lenders
- No reserves required
- Borrower can be currently in a chapter 13 bankruptcy (one year with good payment history)
- Flexible underwriting guidelines
- 30 year fixed rate loans
- No prepayment penalties
- FHA rates are the lowest they have been in years
Why FHA Loans Are Popular Right Now
With low down payments, low interest rates and affordable housing right now, FHA loans have become very popular. Although they are not necessarily right for all borrowers, they do allow people who don’t have a 20% down payment required by conventional financing, to buy a home with a very small down payment of 3.5%.
Other reasons to consider FHA loans:
- FHA allows gifts for down payments and closing costs
- There is no pre-payment penalty if you decide later to refinance or pay off your mortgage early unlike subprime loans, which usually carry a pre-payment penalty.
- An FHA loan may be assumable
- During financial hard times, FHA works with borrowers to help them keep their homes.
FHA Mortgage Insurance Premium
Borrowers who obtain an FHA loan must pay an upfront mortgage insurance premium (MIP) of 1.75% and a small monthly insurance fee. FHA uses this money to fund their obligation to lenders to pay off the mortgage if the borrower defaults on their loan. The lender has no risk. In a conventional loan, there is no insurance or guarantee to the lender if the borrower defaults other than the lender taking back the property through foreclosure procedures and selling the property to pay off the loan balance. However, if properties values decline, the lender will only be able to sell the property for market value. The borrower loses their most valuable asset, their home. FHA makes more sense for borrowers and lenders because there is less risk for all parties.
