RESOURCES

What Is An FHA Loan?

Congress created the Federal Housing Administration (FHA) in 1934, as a way to help the housing market get back on its feet after the great depression. Millions of workers had lost their jobs and people looking to buy a home were having trouble meeting the requirements of the local banks. Mortgage terms usually only guaranteed an interest rate for 3 to 5 years and then required the borrower to pay off the balance in full. Most people had given up on the idea of owning a home and decided to rent; and only 40% of US households were homeowners.

During the 1940’s when many members of our military were returning home from the war, FHA loans became a way for many households to buy their first home. From the 1950’s to the late 1970’s FHA financing terms made it easier for households to own their piece of the “American Dream”. During that time, FHA became part of the Department of Housing and Urban Development's (HUD) offices. By September of 2001, our country’s homeownership rate had risen to a high of 68%. FHA and HUD have insured millions homes since their inception and have helped make homeownership in America what it is today.

    The basic guidelines for an FHA Loan include:
  • Loans may be used to purchase or refinance a primary residence only.
  • The home can be a residence for 1-4 families.
  • Only a minimum down payment is needed (currently 3.5%), slightly higher for multi-unit homes (3-4 units).
  • MIP insurance (FHA’s Mortgage Insurance) is required.
  • There are no restrictions on where a property can be located (unlike a Rural Development loan).
  • The home may be an existing home or new construction, “stick” built or modular.
  • Sellers may contribute up to 6% of the sales price toward a buyer’s closing costs and pre-paids. This would be negotiated and agreed upon in the Purchase Agreeement.
  • There are no household income limits.
  • Gift funds are allowed. (Consult a Home Loan Specialist for specific criteria.)
  • FHA Loans are available with fixed or adjustable rates.

FHA Loans are frequently used by first time home buyers because of what appraisers are required to look for with this type of financing. Health and safety issues will be reflected in the appraisal report and are required to be repaired.

The only drawback considered by some, is the MIP insurance required on FHA loans. MIP (Mortgage Insurance Premium) Fees are similar to Private Mortgage Insurance (PMI) for Conventional Loans. It is an insurance policy to offset losses when a borrower is not able to repay the loan and the lender cannot recover the debt owed after a foreclosure. With this insurance policy in place, there is less financial risk to the lender. This reduced risk is often reflected in lower interest rates available. In most cases, MIP fees will discontinue after five years or when the Loan to Value (LTV) amount reaches 78%, whichever comes last. Stay in touch with your lender when nearing these criteria to insure this does come off your monthly payment.

One advantage of the FHA program is that the mortgage insurance policies are self-funded. Their funding comes from the initial and monthly premiums associated with every FHA loan. FHA is the only government agency that operates entirely from this self-generated income and costs the taxpayers nothing. The monies raised from the mortgage insurance premiums paid by the homeowners are kept in an account that is used to operate the entire program.

Due to ever changing market conditions though, it is always advised to contact one of our Home Loan Specialists to review the specifics of this home loan product and whether this program will fit your needs.