Posted January 20, 2014Tweet
The "FHA mortgage" is a bit of a misnomer. Technically, the loan should be called the FHA-insured mortgage. This is because the FHA is not a mortgage lender but, rather, an mortgage loan insurer.
FHA is an acronym for Federal Housing Administration. The agency was formed in 1934 to promote homeownership among Americans and to aid the formation of stable communities nationwide. In 1965, the FHA became part of the U.S. Department of Housing and Urban Development.
The FHA has insured more than 34 million properties since its formation, and currently insures more than $1 trillion in U.S. home loans.
The FHA is the largest insurer of home loans in the world.
There are many reasons why FHA loans are popular among U.S. home buyers and refinancing households.
One reason is that FHA loans allow for a smaller downpayment than comparable loans via Fannie Mae and Freddie Mac. The FHA will allow a 3.5% downpayment whereas most conventional loans require five percent, at minimum.
A second reason why FHA loans are popular is that mortgage rates can be lower than for a comparable conventional loan. The FHA does not assess risk-based pricing for credit scores below 740; or for condominiums; or for 2-unit homes.
FHA mortgage rates are sometimes 1/2 percentage point lower than rates for Fannie Mae loans.
Lastly, FHA loans can be easier for which to qualify.
The FHA will insure all loans which meets its "guidelines", a compendium of rules covering all aspects of a mortgage and its approval. The FHA mortgage guidelines are considered "looser" than the guidelines for other loan types including conventional loans and VA loans for military borrowers.
The FHA is less strict with respect to credit, income and assets which is why first-time home buyers often consider the FHA as a financing option.
However, one area in which the FHA remains strict is with respect to property condition. The FHA will not insure a home which fails to meet basic safety and habitability requirements.
Home buyers wishing to use FHA-backed financing should keep this in mind. There are minimum standards to which all FHA homes are held. By ensuring the quality of each of these homes, the FHA can mitigate some of its long-term risks.
FHA-insured homes must exist as a single, marketable piece of real estate. A loan, therefore, may not be secured by a bedroom or kitchen within a given home. It may only be secured by the entire home.
An FHA-insured property must be accessible without trespass on an adjoining property. If the property is not directly accessible via public ways, an easement must be associated with the property to provide direct access.
FHA-insured homes must be accessible for a pedestrian or vehicle from a public or private street with an all-weather surface. If the access street is privately owned, it must be maintained by a homeowners association or via agreement with other homeowners.
The FHA requires that its insured homes be free of health and safety hazards. This may include excessive pollution, radioactive materials and mudflows, among other hazards. If these hazards exist, homeowners can provide evidence that their risks have been mitigated and re-submit to the FHA for approval.
FHA mortgage guidelines require that structures on a property, or at a property line, be separated from adjoining buildings by a full-height wall. If the full-height wall is an outer-most exterior wall, the FHA requires that there be enough space between buildings in order to perform wall maintenance, as needed.
FHA-insured properties must be graded so that water drains away from building perimeter walls, and so that water does not pond on the property.
The FHA requires that its insured homes be free of defective construction, poor workmanship, evidence of continuing building settlement, excessive dampness, leakage, decay, termites or any other condition that impairs its safety, sanitation or structural soundness.
FHA-insured homes must have a roof which is water-tight and shows no evidence of missing tiles, shingles, or flashing; or signs of leakage.
An FHA-insured property must have adequate space for living, sleeping, cooking and dining. It must also have sanitary facilities including, but not limited to, bathrooms with showers and/or bath tubs.
An FHA-insured property must have a continuing supply of safe drinking water, sanitary facilities, a safe method of sewage disposal, adequate heating, indoor hot water, and electricity for lights and equipment.
Water, gas, electric and sewer services for an FHA-insured properties must be independent for the property, with no dependence on another property. In a multi-unit building of 2-, 3-, or 4-units where utilities are shared among owners, each unit must maintain a separate shut-off switch for its utilities. Common services including laundry facilities, storage space or heating, are allowed.
The attics and crawl spaces of an FHA-insured home must have proper natural ventilation to reduce excess heat or moisture that can lead to structural decay or deterioration. Crawl spaces must be accessible and clear of debris.
FHA Minimum Property Standards are meant to protect both U.S. homeowners and the Federal Housing Administration. Homeowners know that their FHA-insured home is safe, habitable, and free of hazardous defects. And, for the FHA, the agency knows that its portfolio of homes -- at least at the time of funding -- are in tip-top shape.
There are additional FHA property standards beyond the broad categories listed above. For buyers of foreclosures, this becomes especially important. That's why it's important to pre-approve your mortgage and your property. Pre-approvals are available online, at no cost and with no obligation.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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2014 Conforming & FHA Loan Limits
Mortgage loan limits for every U.S. county,
as published by Fannie Mae & Freddie Mac, and the FHA.