FHA Loans

In 1934 the government set up the Federal Housing Authority (FHA) to help stimulate an economy in crisis. FHA programs were designed to help people buy their houses rather than rent. FHA programs allow more flexibility than is available for borrowers seeking conventional loans (Fannie Mae criteria). However, the FHA does not actually make the loans; they insure them.

Working with approved lenders, the FHA serves to lower the risk for the lender, thus making loans more readily available. If the borrower defaults, FHA pays the lender. Even though the insurance cost is passed down to the home owner, after paying down the loan, the borrower may drop the insurance. The equity that has been built up serves as the security the lender needs to feel comfortable with the loan. With an FHA loan, if the borrower experiences unforeseen hardships, FHA has options to help keep the home out of foreclosure. The lender must follow FHA's servicing guidelines; therefore, an FHA insured loan offers the borrower protection as well as the lender.

FHA programs do have some loan requirements, but they are not as strict as conventional loans. They generally require less down, less stringent credit, and the ability to finance a higher percentage of the value of the house. For instance, FHA only requires a minimum 3% down payment—which is low by industry standards. Also, while they do look at credit history, they are more flexible than conventional loans, looking more at the borrower's ability to repay than at any problems in the past.

Although the requirements are less strict than conventional loans, by law, the FHA can only insure loans up to a maximum amount depending on where the home is. The FHA Maximum Mortgage Limits site will let you look up the limits for the areas of choice. Likewise, the loan size is restricted to a maximum amount of the value of the home. However, it is a very high amount (often up to 97% of the value). So the regulations governing FHA loans are very liberal.

In the long run, FHA loans are much like any other except that they are generally easier to qualify for, and the borrower has more insurance against foreclosure. FHA programs also offer more than just home purchasing plans. They offer refinancing in order to lower interest rates or payment amounts; they offer remodeling money; they even offer cash out or debt consolidation loans.  Whatever your needs are, FHA may be a valid option to pursue.

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