What is an FHA loan?
An FHA loan is a federal-assistance mortgage loan offered by qualified lenders and backed by the Federal Housing Administration.
During the Great Depression of the 1930s, soaring foreclosure and default rates led lenders to tighten their loan requirements to the detriment of the prospective homeowner. The FHA was created during this time to provide lending institutions (such as banks, savings and loan associations, and mortgage companies) with sufficient insurance to allow them to ease up on eligibility requirements for borrowers so that they could be approved for loans that they could not otherwise afford. If a borrower defaults on an FHA loan, the FHA pays off the mortgage from a reservoir of collected fees. The FHA funds this reservoir with fees charged to the borrower, such as an upfront mortgage insurance premium, and small, ongoing monthly fees.
What are some benefits of an FHA loan?
FHA loans offer the following benefits over conventional loans:
How does a home buyer get an FHA loan?
Home buyers who wish to obtain FHA loans need to contact several lenders and ask them if they make FHA-backed loans. Bear in mind that each lender sets its own terms and rates, so comparison-shopping is critical. Next, the lender assesses the borrower for risk by examining their income level, debt-to-income ratio, credit repayment history, and expenses. Certain other factors are also considered, such as how the property will be used, how many units are on the property, and whether the borrower will actually live in the home. Note that prospective homeowners may be denied an FHA loan if they plan to rent the property out to others and not live in it themselves.
What are the limitations and disadvantages of an FHA loan?
In summary, prospective homeowners considering FHA loans should weigh their individual finances, needs and credit history, along with the pros and cons unique to this type of mortgage.