An FHA mortgage is a housing loan where the lender is insured from losses by the Federal Housing Administration (FHA).
What is the Federal Housing Administration
The objective of FHA is to encourage lenders to underwrite loans which they would otherwise not make due to the perceived risks involved.
They do this by insuring mortgages to protect lenders against loss from defaulting borrowers.
The government agency began operations in the 1930s to mend the gap between lenders and borrowers created from the fear that the great depression has instilled on the general public.
With home loans guaranteed by the government, lenders finally started to be more relaxed with credit assessment. And people with low-to-moderate income are able to become homeowners and fulfill their dreams of owning a home.
Some special programs offered by FHA are subsidized.
But to be eligible for an FHA loan, a loan will be subject to size limits that vary from county to county and state to state.
Who are FHA loans for?
In the spirit of helping the lower income population buy their own homes, an individual can qualify for an FHA mortgage as long as he can meet a down payment on the house of as little as 3.5%, and possess a satisfactory credit score.
For a period of time, the down payment requirement was as low as 1% by exploiting a down payment grant or gift.
However, it must be emphasized that for a borrower that has very good credit and able to put at least 10% down, the odds of grabbing a better home loan is much higher by going with a conventional loan.
Compared to credit assessment of traditional loans, FHA loans allows higher debt ratios and more flexible criteria.
For example, should the income of a borrower be insufficient to obtain the required loan even after the more relaxed standards, co-borrowers can get involved even though they won’t be the property’s residents.
Compared to the attractiveness of traditional loans, FHA loans tend to have very comparable points and interest rates when the terms for both similar. The biggest difference tend to be the insurance premiums.
Private mortgage insurance premiums are generally lower than those of FHA mortgages.
In either case, the borrower pays the premiums. Not the lender.
With all that said, home buyers who find down payments unaffordable but have good credit should explore conventional mortgages first instead of going the FHA route by default.
This is because there are housing loan options in the market with no mortgage insurance and down payment requirements. Albeit they come with higher interest rates.
Yet when we do the sums, it might still be more worthwhile than a FHA loan.
All FHA loans are assumable as long as the assumer is a qualified buyer under the guidelines of FHA.
Home owners carrying a FHA mortgage on the house can sometimes exploit the market when selling it.
This opportunity can present itself when the interest rates on the existing FHA loan is much lower than what can be found on the open market. This can make it a very attractive proposition to a buyer or real estate investor.
Because of the loan being assumable, a buyer can save a lot of money from the lower interest rates. Resulting in them being willing to pay a premium or a fee to buy the house in question and assume the mortgage.
In contrast, conventional loans usually come with due-on-sale clauses that enable a lender to demand full repayment of loan balance when a property is sold and changes hands.