Federal Housing Administration Mortgages
The Federal Housing Administration (FHA) is a special program under the jurisdiction of the Department of Housing and Urban Development (HUD). FHA was established in the 1930's to improve housing standards and conditions, as well as provide an adequate home financing system through insurance of mortgages. In other words, FHA was the original mortgage insurance for US families! With the mortgage insurance provided through FHA, families that would otherwise be excluded from the housing market were finally able to buy homes.
How does an FHA mortgage work? FHA insures your lender against loss in the event that you default on your loan. Fundamentally, through this special insurance on the mortgage itself, FHA encourages lenders to make loans that they might otherwise view as too risky.
FHA began operations in the depths of the depression. At that time, many lenders had stopped making new loans altogether because of the large number that were in default. As the US worked its way out of the depression, the FHA began to focus more exclusively on helping low-and-moderate-income population become homeowners. In most cases, low- and moderate-income earners have challenges with buying a house either due to shaky credit or problems saving a down payment. For these people, turning to FHA mortgages allows them to buy their homes.
How do you qualify for FHA help? Well, first of all, you must be buying a home for your own occupancy. This program is not for you if you are looking to buy a property for rental. Secondly, you need to qualify in terms of income and credit. In most cases where you couldn't qualify for a conventional mortgage or the cost of that mortgage would be too high, but could afford a mortgage payment equivalent to your rental payment, FHA can provide you with some assistance.
Frankly, renting your home eats up your money and doesn't return equity into your hands. Owning your home does. This is where the FHA can give regular people a boost up, and into the housing market.
The FHA will insure both existing and newly built homes. In fact, insured loans can be used to finance the purchase of one to four family housing, which means that you can buy a property to live in with your extended family. Are you worried about your aging parents? You could look at a 2 family home and ensure that your parents are in good housing. You can also use FHA loans to refinance debt; so if you are looking to renegotiate a mortgage and you are having problems qualifying for a conventional mortgage at a good rate, you can also look to FHA. Just remember: the mortgage itself must be for your primary residence.
The FHA helps homeowners into the market in more than one way. With the FHA you can buy with as little as a 3 percent down payment. That can save you a lot of time spent saving up in order to get into the housing market. Most conventional mortgages require down payments of 10 percent or more of the purchase price of the home.
Another benefit of the FHA is that many closing costs can be financed. With most conventional loans, the borrower must pay closing costs (the many fees and charges associated with buying a home) equivalent to 2-3 percent of the price of the home. With an FHA loan, you can finance many of these closing costs, thus reducing the up-front cost to you of buying your home.
However, as good as the program is, FHA mortgage insurance is not free. You will pay an up-front insurance premium (which may be financed or rolled into your mortgage amount) at the time of purchase. In addition, you may have to pay monthly premiums that are not financed, but instead are added to the regular mortgage payment.
The FHA does protect you from some predatory lending practices. FHA rules impose limits on some of the fees that lenders may charge in making a loan. For example, the loan origination fee charged by the lender for the administrative cost of processing the loan may not exceed one percent of the amount of the mortgage.
While this program can be very useful, it is limited to certain people; you will have to qualify. To make sure that its programs serve low- and moderate-income people, FHA sets limits on the dollar value of the mortgage loan. These figures vary over time and by place, depending on the cost of living and other factors.
Any person able to meet the cash investment, the mortgage payments, and credit requirements can apply for an FHA mortgage. Applications are made through an FHA-approved lending institution. If you want more information before applying, be sure to check out the HUD website.