What is an FHA Loan?
The Federal Housing Administration (FHA) is operated by the Department of Housing and Urban Development (HUD). The FHA has the responsibility of administering the government insured home loan programs. Like a VA loan, the FHA does not actually lend the money for the home to the borrower but instead insures the loan so that more lenders will be willing to take on the risks of granting the loan to a first time home buyer.
There are many different FHA home loan programs available. One of the most popular is the 203(b) home loan. This particular program is a fixed rate loan for owner-occupied homes and only requires a minimum of 3% down from the borrower. In addition, this particular loan program allows the use of 100% of the closing money to be a gift from a government agency, family member, or non-profit organization.
Benefits to using an FHA home loan
Credit requirements for a first-time buyer are less than what might be needed for traditional type loans. In other words, a person or family with some minor credit problems in the past would find it easier to get a home loan through an FHA home loan program than if they tried to go it alone.
FHA home loans are assumable, which allows the buyer to take over a previous mortgage without the additional cost of obtaining a fresh, new loan. Another important factor is that the seller or lender must pay for part of the closing costs (called non-allowable costs) while the buyer’s allowable costs can be infused, in part, into the loan.
Most, if not all, mortgages require monthly mortgage insurance but the monthly mortgage insurance premium for an FHA loan is less expensive than what is commonly found in traditional loans. An FHA loan also allows for a higher debt ratio than most traditional loans. Individuals and families who earn a lower income will find this an important factor when shopping for a home loan.
FHA Loan Overall
Home shoppers should be aware, however, that the FHA will limit the loan size according to the area of the country in which you live or wish to purchase the home. You should visit the FHA website to learn what the cap is for your particular area, as well as to learn of any other restrictions that may apply to you.
The official website is also a great place to learn more about some of the other programs that are available.