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What is an FHA Loan?

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FHA home mortgage loans are popular due to their low down payment requirement and less stringent lending guidelines when compared to conventional loans.

The Federal Housing Administration, generally known as “FHA,” was established in 1934 to improve home construction, the financing of housing, and improve the quality of life of Americans by providing federal assistance in the form of mortgage insurance coverage, in the event of future default by the homeowner. A part of the United States Department of Housing and Urban Development (HUD), FHA provides mortgage insurance on single-family, multifamily, and manufactured homes throughout the United States. Since the government backs FHA loans, lenders are protected against defaults making it possible for them to offer borrowers:
    • Low Down Payment –  the FHA home requirement for down payment is a mere 3.5% of the purchase price. It can come from the borrower’s funds or a gift from a family member, a charitable organization, a government agency, or even an employer. However, a gift fund cannot come from the borrower’s real estate agent or broker, the seller, nor the builder. The gift fund must not be used or construed as an “inducement” to encourage the buyer to complete the purchase transaction or to lower the sales price of the property;
    • Easy Credit Qualifying – while other loan programs require a middle FICO score of 640 and above to qualify for a mortgage, FHA-insured mortgage only requires a 580 mid-FICO score to be eligible for the 3.5% down payment requirement. That doesn’t necessarily mean that borrowers with credit scores lower than 580 don’t qualify for a home loan anymore. FHA will insure the loan even if a borrower has a credit score of 500. They will be required to come up with a more substantial down payment, instead of the traditional 3.5% requirement. As long as they can put down 10%, they will qualify for an FHA-insured home loan;
    • Low-Interest Rates – the interest rate on FHA loans are lower as compared to a conventional loan. They are typically .50% to 1% lower in interest rate, depending on the market condition, loan-to-value, debt-to-income ratio, and other factors.
    • Low Closing Costs – FHA restricts what closing costs can be charged to a borrower, and how much can be charged based on a standard mortgage transaction. The FHA won’t allow certain fees to be charged by a lender or a third party.
The FHA loan program was created to combat a rash of loan defaults or foreclosures in the 1930’s.  By providing mortgage lenders with insurance to help cover losses, the FHA was able to stimulate the housing markets by enabling mortgage lenders to write loans with less liability. Be that as it may, FHA does not originate nor make the loans directly to the consumer. They insure the mortgage loan against default, thus, reducing the exposure and risk of the lender in case the borrower ends up defaulting on the loan. FHA-approved lenders offer FHA home loans. The lenders take less risk because FHA will pay the claim to the lender in the event of future default by the homeowner. Hence, the loan must meet specific requirements established by the FHA to qualify for insurance coverage.To learn more about FHA mortgages and other requirements for an FHA loan, contact our FHA Loan Specialists or use the tools on this site.

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