FHA Overview

The government offers two kinds of loans, VA and FHA. This article will give an overview of FHA loans.

The Federal Housing Administration (FHA) runs several programs to promote home ownership. FHA was created by the Federal Government to provide affordable financing for qualified borrowers who wish to buy a home. FHA provides an avenue for many people who would otherwise not be able to afford a home.

FHA loans are attractive to lenders because the FHA insures the loan against default. That way, if the buyer finds himself in a position where he can’t make his house payment, the lender knows that the payment of the loan is guaranteed by the FHA. Since the lender has lower risk, he is able to provide loans to people who fall into categories which would otherwise be excluded from approval. Such categories are:

• Consumers with no established credit or low credit scoring
• Consumers with discharged bankruptcies
• Consumers who do not have a large amount of money saved for a down payment
• Consumers with limited funds for closing costs

Borrowers who can provide proof of sufficient income to pay the mortgage are likely to be granted an FHA loan. In lieu of conventional credit scores, the applicant can use alternative credit. Showing records of utility bills, cable TV, insurance premiums, child care or other accounts are examples of alternative credit. Borrowers with a bankruptcy that was discharged at least two years ago are still eligible for an FHA loan. And down payments can be as little as 3% of the selling price of the home.

In addition to the 3% down payment, the borrower pays an upfront insurance premium which is approximately 1.5% of the loan amount. This money can be incorporated into the amount of the loan. The borrower also pays a monthly premium of .5% of the loan amount divided by 12 months. The down payment of 3% can be a gift. No reserves are required. In most instances the seller may assist with closing costs up to 6% which is also financed into the loan amount.

FHA interest rates are competitive with conventional rates for the most part. The mortgage insurance premiums paid on an FHA loan are typically equal to 2.25% of the purchase price of the property with a renewal premium of .500% in subsequent years.