Federal Housing Administration (FHA)
The Federal Housing Administration (FHA) is a United States government agency created in part by the National Housing Act of 1934. The FHA loan program was created to help increase homeownership.
The "FHA", provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories.
FHA insures mortgages on single family and multifamily homes including manufactured homes and hospitals. It is the largest insurer of mortgages in the world, insuring over 34 million properties since its inception in 1934.
FHA mortgage insurance provides lenders with protection against losses as the result of homeowners defaulting on their mortgage loans. The lenders bear less risk because FHA will pay a claim to the lender in the event of a homeowner's default. Loans must meet certain requirements established by FHA to qualify for insurance.
How is FHA Funded?
FHA is the only government agency that operates entirely from its self-generated income and costs the taxpayers nothing. The proceeds from the mortgage insurance paid by the homeowners are captured in an account that is used to operate the program entirely. FHA provides a huge economic stimulation to the country in the form of home and community development, which trickles down to local communities in the form of jobs, building suppliers, tax bases, schools, and other forms of revenue.
The History of FHA
Congress created the Federal Housing Administration (FHA) in 1934. The FHA became a part of the Department of Housing and Urban Development's (HUD) Office of Housing in 1965.
When the FHA was created, the housing industry was flat on its back
Two million construction workers had lost their jobs.
Terms were difficult to meet for homebuyers seeking mortgages. Mortgage loan terms were limited to 50 percent of the property's market value, with a repayment schedule spread over three to five years and ending with a balloon payment.
America was primarily a nation of renters. Only four in 10 households owned homes.
Some Highlights of the FHA Loan Program Are:
Minimal Down Payment and Closing Costs. Down payment less than 3.5% of Sales Price.
100% Financing options available
Gift for down payment and closing costs allowed.
No reserves or required.
FHA regulated closing costs.
Seller can credit up to 6% of sales price towards buyers costs.
Easier Credit Qualifying Guidelines such as:
Minimum FICO credit score of 620.
FHA will allow a home purchase two years after a Bankruptcy.
FHA will allow a home purchase three years after a Foreclosure.
Easier Debt Ratio & Job Requirement Guidelines such as:
Higher Debt Ratio's than other home loan programs.
Less than two years on the job is allowed.
Self-Employed individuals o.k.
These advantages of the FHA loan program has made it one of the best options for most first time home buyers as well as move-up home buyers.
FHA Loans Have Relaxed Credit Standards
For conventional loans, a minimum credit score of 620 is typically required. On FHA loans however, the minimum is 580. FHA loans are also more widely available for borrowers who have either filed for bankruptcy or foreclosure.
For example, on a conventional loan seven years must pass before you will be eligible for refinancing. But with FHA loans, only three years need to pass. If a borrower has filed for bankruptcy, at least four years must pass before applying for a conventional loan. Under FHA, only two years are required.
Lower closing costs
FHA loans are assumable
Debt-to-income (DTI) ratio expanded with a cosigner
Both FHA and low down payment conventional loans require that you have private mortgage insurance (PMI). And both loan types require that it is paid monthly, as part of your house payment.
On FHA loans the annual premium is equal to 0.85 percent of the base loan amount, which means that you will pay a premium of $1,700 per year – or about $142 per month – on a $200,000 loan.