Jan Hurren

What is an FHA Loan?

In 1965 the Department of Housing and Urban Development (HUD) was formed. Within HUD operates the Federal Housing Administration (FHA), which has the primary responsibility for administering the government home loan insurance program. This program allows borrowers, who may otherwise, not qualify for a home loan, to obtain one because the risk is removed from the lender by FHA.

The most popular FHA home loan program for a first time home buyer is the 203(b). This is your standard fixed rate loan for 1-4 family owner occupied houses and only requires a minimum of 3% from the borrower. This loan also permits 100% of their money needed to close to be a gift from a relative, non-profit organization, or government agency.

The main advantage to a FHA home loan is that the credit guidelines for borrowers are not as strict as Conventional Loans sold to Fannie Mae (FNMA) or Freddie Mac (FHLMC). Someone who may have had a few credit problems or no traditional credit should not have a problem obtaining FHA financing. Also, FHA home loans are assumable, allowing a person to take over the mortgage without the additional cost of obtaining a new loan. In addition, the seller or lender must pay for part of the "traditional" closing costs (called non-allowable costs) while a borrower's allowable costs can partially be wrapped into the loan. The monthly mortgage insurance premium is cheaper for an FHA loan verses a conventional loan with 3% down. Finally, FHA loans may require less income to qualify as they will exceed the Conventional debt-to-income ratios of 28/36% as their standard is 29/41%.

Many people make the mistake and assume that FHA loans are only available for first time home buyers. This is not true. FHA loans are available to anyone, whether it’s you’re first or fifth home. FHA Loans can be used to purchase a home or refinance a home. If refinancing a home, the current loan DOES NOT have to be an FHA loan.

HOW AN FHA LOAN WORKS

The FHA does not loan the money to a buyer, it simply insures that the total mortgage will be paid to the lender in the event that the buyer defaults. It is always up to the private lender (bank, credit union, savings and loan) to decide whether or not they will lend the money.

FHA will analyze a borrower's credit history in determining the FHA loan for approval. A borrower who has made timely payments serves as a guide and demonstrates their willingness to repay future credit obligations. The FHA guidelines state that a minimum of two years must elapse since the discharge date. A borrower whose previous residence or other real property was foreclosed on or given a deed-in-lieu of foreclosure within the previous three years is generally not eligible for an FHA insured mortgage.

FHA loans typically do not require the homebuyer to pay more than 3-5% of the total mortgage amount as down payment. Unlike traditional loans, this money may also be a gift to the homebuyer, and does not need to be secured as the homebuyer's own money. Often, there are "points" associated with the FHA loan that are usually worth about 1% of the total mortgage value. These points are paid to lenders in order to help lower the interest rate of the mortgage.

FHA Mortgages may require mortgage insurance. The Mortgage Insurance charged is .5% per year of the loan amount and is charged to the homeowner each month. In addition, FHA charges an upfront mortgage insurance premium of 1.5%

Closing costs on FHA (or conventional loans) usually run between 2-3% of the total loan amount and are the responsibility of the buyer. Typical closing costs include but are not limited to: appraisal report, credit report, Lender fees, Title insurance/Escrow, attorney fees, recording fees, taxes and homeowners insurance.