The Department of Housing and Urban Development (HUD) was created in 1965. HUD over sees the Federal Housing Administration, recognized commonly as FHA.
The FHA’s duty is to administer government loans and to set the FHA loan requirements for the government loan guarantee program.
Many first time home buyer’s ask, What is a FHA Loan?, without ever getting a clear concise answer, we’ll give that to you here. The main purpose of FHA is to allow buyer’s who do not qualify for conventional or “A” loans an opportunity for home ownership.
Without the reduced FHA loan requirements, millions of homeowners would not be able to participate in the “American Dream”.
FHA gives lenders a government guarantee that as long as they, “the lender”, gave the loan in good faith and followed all FHA loan requirements then the government will pay the lender back for losses due to foreclosure, etc.
Buyers who might have some credit problems or in fact they just do not have any of the traditional credit (car loans, credit cards, etc.) might be able to obtaining FHA financing.
Additionally, Federal Housing Administration home loans are assumable, allowing any person who qualifies, the ability to take over your mortgage without the extra cost of getting a new mortgage.
Also, the lender or seller must pay for part of the closing costs (called non-allowable costs) associated with obtaining an FHA loan. The borrower on the other hand “is” allowed to roll all allowable costs into their new mortgage loan making the amount they need to close substantially lower.
Borrowers will find that FHA “mi” (mortgage insurance) is lower for an FHA loan versus a conventional loan with 3.5% down. Lastly, FHA loan requirements often require less income to qualify as these loans can exceed conventional debt ratios of 28/36% as their standard is 31/41%.
#1 FHA Program
The #1 FHA program by popularity was created just for first time home buyer’s is called the 203b. This is your common fixed rate loan for between 1-4 family’s who plan to owner occupy the property and only requires a minimum down payment of 3% from the borrower (s).
The 203b loan also permits 100% of the money needed for closing to be a gift from a relative, organization, non-profit or government agency. Whether the gift is a loan or not, you just need a letter for the lender from the family member stating it is a gift and does not need to be paid back.
Many individuals make the mistake of assuming FHA loans are only open to first-time home buyers. This is just not true. FHA mortgages are available to anyone, whether your buying your first or third home and can be used to buy or refinance a home.
If you are currently looking to refinance a home loan the current mortgage loan does NOT have to be a FHA loan.
The large disadvantage to FHA loans is that the FHA loan requirements limit the size of the loan a borrower can obtain. Others might try to show you that the 1.5% FHA upfront mortgage insurance premium (MIP) is a disadvantage.
However this amount makes just a very small increase in the borrower’s month payment and is partially refundable in certain cases. If you’re still looking for additional information on what is an FHA loan? or FHA loan requirements continue here.