What is an FHA loan?

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What is the FHA?

The FHA, or Federal Housing Administration, is a government agency that was created to coincide with the National Housing Act of 1934. It was founded so as to insure home loans  made by banks and other private lenders, with the general objective of improving housing standards and conditions. Besides stabilizing the mortgage market, the administration would provide a solid and secure system of home financing for the consumer, allowing more people than ever before the opportunity to become a homeowner.

What is an FHA loan?

An FHA loan, then, is a home loan that is insured by the Federal Housing Administration. In layman’s terms, this guarantees to your bank that if you fail to repay the mortgage, the FHA will step in and repay the bank. As such, lenders are willing to make large home loans to prospective homeowners that they would not usually approve. Meaning that lower income Americans are given access to funds and the opportunity to buy a home that they would not otherwise be able to afford.

Why an FHA loan?

Loans from the Federal Housing Administration are a popular option for borrowers, mainly because they allow borrowers access to funds to invest in a home with a relatively low down payment. The very reason for the existence of the FHA is to promote home ownership, therefore FHA loans by definition are designed to allow more people to qualify for a mortgage. Of course, FHA loans do not apply to everyone, but a huge percentage of Americans can and do benefit from their existence.

“Loans from the Federal Housing Administration are a popular option for borrowers, mainly because they allow borrowers access to funds to invest in a home with a relatively low down payment.”

The benefits of an FHA loan: benefits

  • A relatively small down payment (as low as 3.5%), allowing low income Americans access to funds and the opportunity to purchase their own home.
  • In general, a lower mortgage insurance is paid on an FHA loan than a conventional loan, resulting in a lower monthly payment.
  • FHA loans offer the same interest rate for all borrowers, therefore there is no blown up rates for those who have credit issues. All is required is that you qualify for the loan itself.
  • Higher debt ratios allow for those with a higher total monthly debt qualify an FHA loan when they perhaps wouldn’t qualify for a conventional loan.
  • Similarly, credit history is not so much of an issue when applying for an FHA loan; guidelines do not demand a minimum credit score, simply that there is no preexisting negative history on their credit report.

The drawbacks of an FHA loan: drawback

  • The loan amount limitations are perhaps the biggest or at least the most conspicuous drawback of FHA loans. Limits may vary, but they are generally lower than conventional loans.
  • The mortgage insurance is also a cost that many do not consider. This insurance is generally more costly than with a conventional loan.
  • There are limited options regarding FHA loans; there are not as many lenders available, therefore there are not as many specific options available to those who wish to borrow and become homeowners.
  • An acceptable payment history is expected, even if there is no minimum credit score required when applying for an FHA loan.
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FHA loans vs. conventional home loans?

So, why is an FHA loan preferable over a conventional home loan? How do the two relate? Well, conventional mortgages are generally easier to process and are more favorable for home equity. This is because they require higher down payments than FHA loans – often, up to 20% of the overall amount. While there may be strict requirements regarding credit score when applying for a conventional home loan – a score that will affect the available interest rate – these are more liberal with an FHA loan. Lenders of FHA loans, backed by the fact that the loans are insured, are more willing to look at the overall credit picture rather than the score alone.

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