FHA Loans

FHA History

FHA loans were created by the Federal Housing Administration (FHA) after the Great Depression to make home loans affordable and available to a wider spectrum of the population. Since then, FHA loans have only increased in popularity amongst home owners, and it still fulfills the same objective, which is making home ownership more affordable for people who might not otherwise be able to make a home purchase. Essentially FHA is a government organization that backs and insures private loans and lenders against losses due to foreclosure and default, which in turn allows those lenders to relax some of their qualifying requirements.

What is an FHA Loan?

An FHA loan is a loan insured against default by the FHA. In other words, the FHA guarantees that a lender won’t have to write off a loan if the borrower defaults – the FHA will pay. Because of this guarantee, lenders are willing to make large mortgage loans.

How do FHA Loans Work?

The FHA promises to pay lenders if a borrower defaults on an FHA loan. To fund this obligation, the FHA charges borrowers a fee. Home buyers who use FHA loans pay an upfront mortgage insurance premium (MIP) of 1%. They also pay a modest ongoing fee with each monthly payment.

If a borrower defaults on an FHA loan, the FHA uses collected insurance premiums to pay off the mortgage.

Who Can Get an FHA Loan?

Almost anybody can get an FHA loan. There are no income limits – like you may find with first time home buyer programs. However, there are limits on how much you can borrow. In general, you are limited to loan amounts relative to home prices in your area. To find the limits in your region, visit HUD’s Website.

Why are FHA Loans so Great?

FHA loans are not for everybody. Nevertheless, they are a great help to some borrowers. FHA loans allow people to buy a home with a down payment as small as 3.5%.

FHA loans offer a few other bells and whistles:

  • Easier to use gifts for down payment and closing costs
  • No prepayment penalty (a big plus for subprime borrowers)
  • An FHA loan may be assumable