FHA Mortgage Loans
What you should know about FHA
FHA insured mortgages can be used for many different purposes. Whether you are buying your first home, looking refinancing your current home or even if you have found a home that needs rehabilitation work— the FHA mortgage program can help you.
What is the Federal Housing Administration?
The Federal Housing Administration, generally known as “FHA”, provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories. FHA insures mortgages on single family and multifamily homes including manufactured homes and hospitals. It is the largest insurer of mortgages in the world, insuring over 34 million properties since its inception in 1934.
What is FHA Mortgage Insurance?
FHA mortgage insurance provides lenders with protection against losses as the result of homeowners defaulting on their mortgage loans. The lenders bear less risk because FHA will pay a claim to the lender in the event of a homeowner’s default. Loans must meet certain requirements established by FHA to qualify for insurance.
Why does FHA Mortgage Insurance exist?
Unlike conventional loans that adhere to strict underwriting guidelines, FHA-insured loans require very little cash investment to close a loan. There is more flexibility in calculating household income and payment ratios. The cost of the mortgage insurance is passed along to the homeowner and typically is included in the monthly payment. In most cases, the insurance cost to the homeowner will drop off after five years or when the remaining balance on the loan is 78 percent of the value of the property -whichever is longer.
How is FHA funded?
FHA is the only government agency that operates entirely from its self-generated income and costs the taxpayers nothing. The proceeds from the mortgage insurance paid by the homeowners are captured in an account that is used to operate the program entirely. FHA provides a huge economic stimulation to the country in the form of home and community development, which trickles down to local communities in the form of jobs, building suppliers, tax bases, schools, and other forms of revenue.
The history of FHA
Congress created the Federal Housing Administration (FHA) in 1934. The FHA became a part of the Department of Housing and Urban Development’s (HUD) Office of Housing in 1965.
When the FHA was created, the housing industry was flat on its back:
- Two million construction workers had lost their jobs.
- Terms were difficult to meet for home buyers seeking mortgages.
- Mortgage loan terms were limited to 50 percent of the property’s market value, with a repayment schedule spread over three to five years and ending with a balloon payment.
- America was primarily a nation of renters. Only four in 10 households owned homes.
During the 1940s, FHA programs helped finance military housing and homes for returning veterans and their families after the war.
In the 1950s, 1960s and 1970s, the FHA helped to spark the production of millions of units of privately-owned apartments for elderly, handicapped and lower income Americans. When soaring inflation and energy costs threatened the survival of thousands of private apartment buildings in the 1970s, FHA’s emergency financing kept cash-strapped properties afloat.
The FHA moved in to steady falling home prices and made it possible for potential home buyers to get the financing they needed when recession prompted private mortgage insurers to pull out of oil producing states in the 1980s.
By 2001, the nation’s home ownership rate had soared to an all time high of 68.1 percent as of the third quarter that year.
The FHA and HUD have insured over 34 million home mortgages and 47,205 multifamily project mortgages since 1934. FHA currently has 4.8 million insured single family mortgages and 13,000 insured multifamily projects in its portfolio.
In the more than 60 years since the FHA was created, much has changed and Americans are now arguably the best housed people in the world. HUD has helped greatly with that success.
Financing Your FHA Loan
Currently, FHA financing requires a 3.5% down payment minimum to obtain a home loan (purchase) and can go to 85% cash out on a refinance and up to 97.75% of your home value if you do a standard rate and term refinance. Even better- you can use the FHA 203k program to finance the remodeling, rehabilitation or renovation of your existing home or the home you are going to purchase and the best part is….you can do so using up to 110% of the completed value of your home.
FHA Home Loan Guarantee Program
- FHA loans offer a loan guarantee for mortgage companies. If you acquire a FHA loan to purchase a home, the FHA is not actually lending money to you, the buyer; the FHA simply guarantees the lender in case you, the borrower, default on your mortgage payments.
- You can pay as little as a 3.5% of the purchase price of your home for your down payment, and finance your closing costs with your mortgage loan.
- You can purchase manufactured homes and condominiums with a FHA loan.
FHA Loans and Credit Issues
FHA loans are a great way for individuals and families to purchase a home with low down payment and favorable mortgage loan terms. However, it is important to consider your credit history before you apply for a FHA loan. Before you can apply for a FHA loan, a mortgage specialist will examine your credit history for any obstacles that would cause you to be denied a loan.
Some of the credit requirements the FHA has for loan approval include:
- To be eligible for a FHA loan you must have at least two lines of credit, such as rent history, or utility or cell phone bills. In some cases, the FHA may accept other forms of credit that do not appear on your credit history. If you do not have a credit history, it is to your benefit to establish some type of credit and make the payments on time. This will improve your credit score and show a history of timely payments that the FHA needs to approve you for a loan.
- If you have a history of late payments, the FHA may overlook them. To qualify for a FHA loan you must have an overall on-time payment history. The FHA understands that sometimes financial difficulties occur and may overlook a period of late payments on your credit history as long as your overall payment history is consistent.
- In most cases you can not get a FHA loan if you have had a foreclosure within the last three years. The FHA will look at the circumstances surrounding the foreclosure and then decide if you are eligible for a loan.
- If you have any delinquent federal debt such as student loans or tax liens, you are not eligible for a FHA loan.
- If you have judgments against you, you still may be eligible for a FHA loan if the judgments are paid before closing.
- If you have items that are in collections, you still may still be eligible for a FHA loan if your credit history meets FHA requirements.
- If you have filed for a Chapter 7 bankruptcy, you still may qualify for a FHA loan if the bankruptcy has been discharged for a minimum of two years, you have stable employment, and you have re-established good credit. If you are married, these conditions also apply to your spouse.
- If you have filed for a Chapter 13 bankruptcy, you must have made your payments on time and adhered to a payment plan for at least one full year to qualify for a FHA loan. You must re-establish your credit and be in good standing. You must also have a stable job and be able to make the payments on the amount of the loan for which you apply. You will also need written approval from the bankruptcy court trustee, and you must submit a written explanation of why the bankruptcy occurred with your loan application.
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