What to know about FHA loans

It's a common misconception, but in fact, the FHA is not a lender. Nor does the FHA give people money to buy a home or set interest rates on home loans. Rather, the FHA, or Federal Housing Administration, is a federal government agency that offers mortgage insurance on loans originated by lenders that are approved by the agency. This insurance protects the lender in case the borrower defaults on the loan.

The FHA was set up in 1934 after the Great Depression and is a division of the U.S. Department of Housing and Urban Development, or HUD. FHA-insured loans enjoyed decades of popularity, but then fell out of favor during the recent housing boom in part because lenders began to offer subprime loans that had artificially low initial interest rates and monthly payments. These subprime loans have since proved disastrous. As a result, lenders have tightened their credit standards and borrowers have flocked to the comparative safety and familiarity of FHA-insured loans.

In 2007, the FHA backed about $60 billion of residential mortgages. In 2008, that figure is expected to skyrocket to almost $224 billion. That means FHA-backed loans now make up a huge segment of the U.S. mortgage market. For many borrowers, an FHA-insured loan is the only option they have to buy a home or refinance their current mortgage. Our FHA loan comparison questionnaire helps borrowers compare FHA loans with other types of loans.

Who should consider an FHA-insured loan?
According to the FHA's Web site, FHA-backed loans are especially attractive for first-time homebuyers who fit certain criteria.
Buyers attracted to FHA-backed loans
  • Have a little cash for a down payment and closing cost.
  • Have imperfect credit
  • Want to keep their monthly payments as low as possible.
  • Are concerned that they may not be able to qualify for a loan.
  • Are concern about the possibility of monthly payment increase.
What are the advantages of FHA-insured loans?
There are several advantages to obtaining a loan backed by the FHA.
  • Competitive interest rates.
  • Smaller down payment required as a percentage of the purchase price.
  • A gift from a family member, employer or charitable organization can be put toward the down payment.
  • Minimum credit score not required, though some lenders expect a score of at least 580.
  • Lender can consider payment of utility bills, rent, auto insurance premiums and other items if the borrower doesn't have an established credit history.




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