What is an FHA Loan?
FHA loans are mortgages insured by the Federal Housing Administration (FHA). This administration is part of the U.S. Federal government's Department of Housing and Urban Development and was established in 1934. The purpose of the FHA is to improve housing standards and support homeownership.
An FHA loan isn't made directly by the government. Instead, the Federal Housing Administration issues mortgage insurance that helps to provide security for FHA home lenders. Since 1934, the U.S. Department of Housing and Urban Development reports that it has insured over 50 million mortgages.
If you're buying for the first time, FHA first-time home buyer loans can be a great pathway to homeownership. FHA first-time home buyer loans can unlock the front door of a single-family home in the neighborhood of your choice.
Where did the FHA home loan program come from?
Back in the 1930s, the U.S. was undergoing the "Great Depression." This was a worldwide economic downturn that caused job losses and other economic disruptions. People who wanted to buy homes were running into obstacles, including tough terms from lenders like requirements for a 50 percent down payment and paying off the mortgage in only three to five years. With lenders reluctant to lend outside of these strict terms that almost no one could qualify for, Congress stepped in and created the Federal Housing Administration.
The FHA doesn't directly fund mortgages. It operates its home mortgage insurance premium program, also called MIP. In case borrowers can't pay back their mortgage, the FHA mortgage insurance program will cover the risk to FHA home lenders.
What are the advantages of FHA loans?
One of the biggest advantages to an FHA loan is how flexible their terms are, which makes it easier for more people to qualify for a mortgage. Low down payment requirements, starting at 3.5%, are another advantage for Federal Housing Administration-insured loans.
Is your credit less than perfect? For first-time homebuyers who have limited savings, or for home buyers with lower credit scores or potential derogatory marks, FHA loans can be an excellent choice in a home mortgage program.
FHA loans aren't just for first-time homebuyers. Anyone who meets lending criteria can be eligible for an FHA home mortgage.
Who could benefit from an FHA loan?
FHA loans have more flexible underwriting terms than conventional mortgages. Underwriting is the mortgage industry term for gathering and verifying the information from prospective buyers to determine if they qualify for a specific home loan, how much they qualify for, and what the terms of the loan will be.
People can qualify for FHA loans with credit scores below 580. However, if you have a credit score above 580, you could potentially qualify for the FHA low down payment option of 3.5%. You can also have co-borrowers with an FHA loan. People who have had bankruptcy within the past two years or more may be good candidates for an FHA loan. And, if you've had a foreclosure within the past three or more years, you may also qualify for an FHA loan.
FHA loans can help people to buy multi-unit properties, up to four units. Some people choose to buy a multi-unit property through an FHA loan, live in one part, and rent the other units out. FHA loans also come with more lenient debt-to-income and housing cost ratios. You can qualify for an FHA loan with housing costs of up to 33% to 36% of your gross monthly income.
How does FHA mortgage insurance work?
Mortgage insurance is part of a home loan whenever the down payment on a home, or home equity, is less than 20%. The Federal Housing Administration's mortgage insurance premiums or MIP, have an up-front or one-time component and a monthly payment for each year's mortgage insurance premium that's included in your monthly mortgage payment.
Upfront mortgage insurance premiums (UFMIP) are calculated when your mortgage is issued and are part of your closing costs. Mortgage insurance premiums after you buy the home are added to your monthly payment. Mortgage insurance premiums for FHA loans will last for the life of the loan unless you can make a down payment of 10% or more. With a down payment of 10% or greater, MIP lasts for 11 years.
Getting an FHA mortgage from CTC Mortgage
One of our mortgage specialists will be glad to work with you to discover your options for an FHA home loan. Contact us today to learn what your next steps are in getting an FHA loan as a first-time homebuyer, experienced home buyer, or somewhere in-between. For more information on FHA loans and the Federal Housing Administration, please visit the FHA's website at www.FHA.gov.