What is the FHA?
The FHA’s main objective is to assist in providing housing opportunities for low and moderate-income families. FHA insured mortgage loans are a type of public assistance and historically have allowed lower income Americans to borrow money for the purchase of a home that they would not otherwise be able to afford. Anyone who is a U.S. citizen, a permanent resident alien, or a non-permanent resident with a work visa and who meets the FHA’s lending guidelines can apply for a FHA-insured mortgage loan.
The Federal Housing Administration, commonly known as “FHA” is an agency of the federal government that provides mortgage insurance on loans made by FHA-approved lenders. Congress created the Fedral Housing Adminstration in 1934. The FHA became a part of the Department of Housing and Urban Development in 1965.
Every loan … credit card car loan, or mortgage … carries a certain element of risk. Lenders are most concerned with the risk of default … the risk that homeowners won’t repay their mortgage loan. Low down payments and low credit scores increase lenders concern about risk. The smaller the down payment, the greater the risk that the borrower will walk away from the house when times get tough.
FHA mortgage insurance provides FHA-Approved Lenders with protection against losses as the result of homeowners defaulting on their mortgage loans. The lenders bear less risk because FHA will pay-off the lender’s mortgage in the event of a homeowner’s default. The added comfort level of FHA insurance enables lenders to consider applications from buyers with as little as 3.50% down payment and credit scores in the mid-600 range. Loans must meet strict requirements established by the FHA to qualify for insurance.
As my Dad used to say, “Nothing in life is free.” The cost of this mortgage insurance is passed along to the homeowner. An up-front mortgage insurance premium (UFMIP) equal to a percentage of the loan amount is due at closing. This UFMIP is normally added to the loan amount and financed over the term of the loan. In addition, there is a monthly mortgage insurance premium (MIP), also referred to as PMI … that is included in the monthly payment.
In summary … FHA enables homebuyers to own their own home with a small down payment. Little equity means greater risk to the lender. Greater risk means higher interest rates. FHA mortgage insurance reduces lender concerns. Borrower pays UFMIP and MIP to reduce lenders’ risk. When compared to conventional financing, an FHA-insured mortgage loan provides those homebuyers with limited cash and lower credit scores with the best low-cost financing option.
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