In 1934, the government set up the Federal Housing Authority (FHA) to help stimulate an economy in crisis. FHA loan programs were designed to help Americans buy their houses rather than having to rent. FHA programs give buyers more flexibility than what is available for borrowers seeking conventional loans (Fannie Mae criteria) from a mortgage company. However, it is important to note that the FHA does not actually make the loans; they only insure them.
How Do FHA Loans Work?
By working with approved lenders the FHA helps by lowering the risk for the residential loan issuer, which gives more buyers access to loans they need. If the borrower defaults on the loan, the FHA pays the lender. Although the insurance cost associated with this type of loan is passed down to the homeowner, once the loan is paid down, the borrower can decide to drop the insurance. The equity built up over time serves as the security the lender needs to feel comfortable when approving the loan. If a homeowner experiences unforeseen hardships and has an FHA loan, the organization has options available to help them avoid foreclosure. Working with a mortgage broker for this type of loan offers the borrower protection because the lender must follow FHA’s servicing guidelines.
What Are the Requirements?
FHA programs are not as strict as conventional loans when it comes to requirements for borrowers. They generally require a lower down payment, more flexibility for credit scores, and the ability to finance a higher percentage of the home’s value. FHA only requires a 3.5% down payment minimum, which is typically low compared to industry standards. While the organization does look at your credit history, your ability to repay the loan holds more weight than any credit issues in your past.
FHA loans may be more flexible than conventional mortgages, but by law the FHA is only able to insure loans up to a certain amount depending on the home’s location. Borrowers are able to check the maximum limit by working with their mortgage company. As a result, the loans themselves are restricted to a maximum percentage of the home’s total value.
At the end of the day, these loans can be easier to qualify for while also giving the borrower more protection from foreclosure. FHA programs also offer refinancing options in addition to residential loans. No matter what your needs are, there is an FHA option to help reach your goals. Learn how to get pre-qualified for a home loan today!