Understanding the Basics and Requirements of FHA Loans

Saturday, October 7, 2017, 6:00 AM | Leave Comment

There are various misconceptions regarding FHA loan programs and their significance. This is why it is important to be aware of the basic aspects and requirements of FHA loans.

These loans feature lower down payments and less stringent standards for lending, which makes them popular among mortgage borrowers.

Federal Housing Administration is the government agency that is mandated to insure the mortgages. Borrowers who have FHA loans are required to pay for the mortgage insurance and this gives the lender protection from loss in case the borrower defaults.

Lenders are able to provide FHA loans with less stringent lending standards, flexible requirements for qualification and competitive interest rates.

  • History of FHA Loans

    • During the Great Depression, defaults and foreclosures were skyrocketing. This led to the introduction of FHA loans as a response by the government to address the financial crisis.

    • Federally insured loans were created to reduce lender risk, stimulate the market and give lending institutions peace of mind.

    • With insured mortgages, lenders were more likely to issue substantial mortgages in situations where they would not have typically approved the application for the loan.

  • Basics of FHA Loans

    FHA has clear a set of guidelines that pertain to housing loans. When borrowers are able to fulfill these guidelines, the loans are insured by FHA to protect lenders. Different criteria are applicable for qualifying borrowers.

    • FHA allows lower down payments and qualifying credit is based on more lenient criteria in comparison to traditional loan programs. Learn more about FHA loan requirements here.

    • FHA loans are mortgages that can only be issued by lenders that are federally qualified. They are designed to cater for the low and moderate income borrowers that lack the ability to make large down payments.

    • The loans enable borrowers to borrow almost the entire value of the property.

    • Since the down payment requirement is obtainable from grants or gifts, FHA loans are a popular choice for people who are buying their first homes.

  • Qualifying for FHA Loans

    • FHA loans are provided to low and moderate income individuals. Down payments are low and they go lower for individuals who have higher credit scores.

    • Borrowers pay monthly or yearly premiums for mortgage insurance to FHA for the purpose of insuring the loan that is issued by the lending institution. If the borrower defaults, the financial risk of the lender is minimized because the FHA covers the payments.

    • Lack of credit history does not present a challenge when dealing with FHA loans. The lender may consider other records that reflect your payment history such as rent and utility payments rather than a credit report.

    • Individuals who have been bankrupt or gone through foreclosure may qualify for the FHA loan. It is important to note that a lower credit score and down payment means that the interest rate will be higher.

  • Loan Requirements

    • Along with giving first-time homebuyers and people with low income or credit a mortgage opportunity, the Federal Housing Authority has outlined specific lending requirements that include a steady employment history or at least two years of being successfully self-employed.

    • Borrowers are expected to be two and three years removed from bankruptcy and foreclosure respectively.

    • Borrower must meet the requirements of legal age, possessing a Socially Security Number and being a lawfully recognized resident of the US.

    • The borrower must use a lending institution that the FHA board has approved.

    • FHA advisors are available to help people determine whether an FHA loans is a suitable mortgage for their situation.

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