For many people, especially first time home buyers, it may be difficult to purchase the home of your dreams. Homes are expensive, especially when they need repairs and most people can’t afford them on their own. That’s where the FHA steps in. The FHA, or federal housing administration, is an agency of the federal government that insures loans for new and existing homes, along with loans that are approved for home repairs.
The FHA was created in 1934 and became an integral part of the real estate Department of Housing and Urban Development Office of Housing, HUD, in 1965. Basically, the FHA helps home buyers receive the amounts of the loans they qualify for and assist lenders by reducing their risk for issuing loans. An FHA loan makes it easier for people to qualify for a mortgage. The FHA guarantees to lenders that they won’t have to write off any loan, even if the borrower or home buyer fails to, because the FHA will pay. Pretty much anyone can receive an FHA loan. There are no income limits, but there are restrictions on how much money you can borrow for the FHA loan. The FHA requires everyone who wants an FHA loan to have good debt to income ratios and good credit. The reason why the FHA promises to pay lenders if the home buyer isn’t able to is because the FHA charges an upfront fee.
Before a homebuyer can get an FHA loan they must pay the FHA an upfront mortgage insurance premium of 1.5%, along with a small ongoing fee with each monthly payment. So, if the home buyer isn’t able to pay the FHA loan, the FHA uses the collected insurance premiums to pay off the lenders. Many people like FHA loans because they allow people to buy houses with a down payment as small as 3 or 4%. There are some advantages to an FHA loan, including no prepayment penalty, easier to use gifts for down payments and closing costs, they are a possible outlook during hard financial times and all FHA loans may be assumable. Some disadvantages of an FHA loan is that it may not offer enough money you need for a large mortgage.
Also, the upfront FHA mortgage insurance premium can cost more than private mortgage insurance. The FHA also charges monthly premiums along with their upfront mortgage insurance premium. But, the FHA offers many different types of loans, especially for first time home buyers. For example, the 203(b) Fixed Rate home loan keeps down payments to the minimum and closing costs are often reduced. The FHA will finance up to 97% of this loan, and there is no minimum income requirement. But the FHA does not make home loans, they just insure the loans. All together, FHA loans are a good way for home buyers to purchase the home of their dreams. But interest rates are subject to change anytime, due to market fluctuations.
FHA loans are great for people who want to buy a home, but have hardly any money saved. The FHA is there to help graduating college students, newlyweds or people with bad credit. These loans are a great alternative and are open to almost everyone.