Basics of an FHA Loan

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Basics of an FHA Loan

The FHA has been in the business of helping Americans buy and keep their homes since 1934. Once an entity of its own, the FHA is now a part of the Federal Department of Housing and Urban Development (HUD). The FHA does not lend money. So what exactly does the FHA do to help Americans become homeowners?

The FHA insures mortgage loans. To a mortgage lender this is very good news. It means that should a borrower default on a loan the FHA will pay the lender its losses. Lending money becomes less of a risk for the lender. This still leaves the question, "how does this help the average American become a homeowner?"

The FHA mortgage insurance allows a lender to offer a mortgage loan in confidence to buyers who would otherwise present to great a risk, and therefore not qualify for a loan. However, the FHA does more than make more loans available to more people. The FHA makes loans more affordable. In exchange for offering mortgage insurance to the lender, the FHA demands that the lender lessen certain requirements for obtaining a loan.

Basic FHA loan qualifications are simply met. A borrower must; be a lawful US resident, have a social security number, and be old enough to sign on a mortgage loan per your states laws. The borrower must also intend to live in the home and have a two year employment history.

One of the most valuable demands the FHA places on a lender is the lack of a minimum credit score. Rather than a credit score the FHA looks at credit history. The FHA understands that life has its bumps and bruises and unforeseeable things can affect a credit score. The FHA wants to know that you have an overall history of paying your bills on time.

Another valuable aspect of an FHA loan to a borrower is the down payment. The down payment on an FHA insured loan can be as low as 3.5% of the overall purchase price of the home. Additionally, the down payment money can come from almost any source. The money can be a gift from a family member, or even come from a charitable organization. Saving for a down payment prevents many people from becoming homeowners. The FHA loan virtually eliminates this problem.

Lastly, an FHA insured loan generally has among the lowest interest rates available. Lower interest rates make monthly payments more affordable.

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