Posted May 8, 2014Tweet
As the U.S. housing market recovers from last decade's downturn, today's home buyers aren't always flush with cash. For buyers with less than 20% availabe for downpayment, loans via the Federal Housing Administration are a popular option.
The FHA allows mortgage loans with as little as 3.5% down at today's current mortgage rates.
The Federal Housing Administration (FHA) was established in 1934, which, in U.S. history, was a period of "heavy renting". The country was emerging from The Great Depression. Just 4 in 10 households owned their homes.
At the time, the mortgage terms offered by lenders were onerous. To get a loan meant to make a 50% downpayment; to agree to a loan term of 5 years or fewer; and, to make a large "balloon" payment to the bank after the mortgage's first few years.
Few U.S. consumers could meet the terms of a 1930s mortgage. Meanwhile, the government wished to increase the rates of homeownership nationwide. With more homeowners, the government reasoned, neighborhoods would stabilize and the U.S. economy would get back on track.
From this, the FHA and its flagship mortgage program was born.
The main feature of the FHA-backed mortgage was its Mortgage Insurance Premium (MIP) program, a self-sufficient insurance fund through which the FHA could insure the nation's lenders against "bad loans".
In order for a bank to get the FHA's insurance on its loans, it was required to verify that its loans met the FHA's minimum qualification standards.
These rules came to be known as the FHA mortgage guidelines.
In time, the FHA MIP system gave banks confidence to make better loans with better terms for hopeful U.S. home buyers. Soon, the downpayment requirements for a home loan dropped; 5-year loan terms were replaced with longer terms of 15 and 30 years; and mortgage rates dropped.
The FHA is currently the largest insurer of mortgages in the world.
In today's expanding economy, U.S. home buyers have a handful of mortgage loan options.
As examples, conventional loans are available via Fannie Mae and Freddie Mac; Rural Housing Loans are available via the USDA; and, 100% loans are available via the Department of Veterans Affairs and its VA loan.
Even jumbo mortgages and private loans have made a comeback of late.
However, loans backed by the Federal Housing Administration remain in high demand. The FHA loan's combination of low rates, low downpayment, and flexible lending guidelines have made it one of most common loan choices for home buyers today.
There are benefits to choosing an FHA loan. Here are some of the biggest.
It may seem odd to call FHA mortgage insurance a benefit since it doesn't come free, however, FHA MIP is what makes the program possible. Without the MIP, FHA-approved lenders would have little reason to make FHA-insured loans. However, as a homeowner or home buyer, you have ways to limit your FHA MIP costs. You can use a 15-year mortgage term, for example; or make a downpayment of at least 5 percent, or use the FHA HAWK program.
For today's home buyers, there are only a few mortgage options which allow for downpayments of five percent or less. The FHA is one of them. With an FHA mortgage, you can make a downpayment as small as 3.5%. This benefits home buyers who don't have a lot of money saved up for downpayment; and, home buyers who would rather save money for moving costs, emergency funds, or other needs.
The FHA is aggressive with respect to gifts for downpayment. Very few loans programs will allow your entire downpayment for a home to come from a gift. The FHA will. Via the FHA, your entire 3.5% downpayment can be a gift from parents or another relative, an employer, an approved charitable group, or a government homebuyer program. If you're using a downpayment gift, though, you'll need to follow the process.
Not every home buyer will have a valid social security number and, according to the FHA, that's okay. FHA guidelines permits loans to employees of the World Bank and foreign embassies, for example. The FHA will also insure loans for non-permanent resident aliens.
FHA loans can be funded by any FHA-approved lender. This includes mortgage lender, savings-and-loans institutions, and credit unions. The marketplace for FHA loans is giant, which creates competitive pressure among lenders to offer low FHA rates and low FHA fees. It pays to "shop around" on an FHA loan. Furthermore, because different banks use different methods to underwrite, your FHA loan can be declined by Bank A but approved by Bank B. If you meet the rules of the FHA, you can apply until your loan get approved!
Via the FHA, you can get a mortgage of almost any type. The agency is best-known for its traditional 30-year fixed-rate mortgage, but the FHA also offers a 15-year fixed rate loan as well as a series of adjustable-rate mortgages (ARMs). In addition, the FHA insures purchase-and-improvement loans for when you want to buy a home that needs repairs; 203k construction loans for when you want to buy a home that's newly built; and energy-efficiency loans for when you want to finance the costs of energy-efficiency improvements into your loan. The FHA also provides a full line of FHA refinance products.
FHA home buyers are able to purchase any home type in any U.S. neighborhood -- whether in the 50 United States, the District of Columbia, or any U.S. territory. The FHA will insure single-family detached homes, 2-unit homes, 3-unit homes, 4-unit homes, condominiums, mobile homes and manufactured homes.
Of all the available loan types in today's U.S. market, FHA loans are among the most forgiving with respect to credit standards. The FHA does not require "perfect credit" and even instructs its approved lenders to look beyond isolated "credit events" and to consider a borrower's complete credit history -- regardless of credit score. Even borrowers with a recent foreclosure, short sale, deed-in-lieu or bankruptcy can be eligible for FHA financing. Mandatory 3-year waiting periods do not exist with an FHA loan.
A "loan limit" is the maximum allowable loan size for an area and, as another FHA benefit, FHA loan limits can be extended as conventional loan limits are. In Orange County, California, for example, or New York City, the FHA will insure up to $625,500 for a mortgage. For 2-unit, 3-unit and 4-unit homes, FHA loan limits are even higher -- ranging up to $1,202,925.
A little-known FHA benefit is that the agency will allow a home buyer to "assume" the existing FHA mortgage on home being purchased. The buyer must still qualify for the mortgage with its existing terms but, in a rising mortgage rate environment, it can be attractive to assume a home seller's loan. 5 years from now, for example, a buyer of an FHA-insured home can "inherit" a seller's sub-4 percent mortgage rate.
Via its 203k program, the FHA offers construction loans to home buyers planning upgrades to a new home; and homeowners planning to make repairs to home already owned. Via the FHA 203k loan, projects including new roofing, structural additions, and complete home tear-downs. The 203k loan can be applied to homes in need of minor repairs as well as fixer-uppers. The FHA is the only federal government agency to issue such a loan.
Another advantage for FHA-backed homeowners is access to the FHA Streamline Refinance. The FHA Streamline Refinance is an exclusive FHA program which offers homeowners one of the simplest, quickest path to a refinance -- it even prescribes your closing date. Via the FHA Streamline Refinance, there are no credit score checks, no income verifications, and home appraisals are waived completely. In addition, via the FHA Streamline Refinance, homeowners with a mortgages pre-dating June 2009 get access to reduced FHA mortgage insurance rates.
For more than 80 years, the FHA home loan program has helped U.S. homeowners purchase homes affordably and refinance them. Compare today's rates and see what an FHA loan can do for you.
FHA mortgage rates are available online at no cost, with no obligation to proceed, and with no social security number required to get started.
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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