Launched during the Great Depression, Federal Housing Administration loans were once quite common, when foreclosures and default rates were on the rise. As other loan programs became available and housing prices eclipsed the program's lending limits, FHA-insured loans fell out of favor. But in today's current economic climate, with mortgage money much harder to obtain and potential home buyers feeling the squeeze of the economic downturn, FHA loans are once again seeing a resurgence in popularity.
What is an FHA Loan?
An FHA loan is a loan insured by the Federal Housing Administration. The FHA itself does not make or guarantee loans, it simply insures the loan, minimizing the default risk mortgage lenders face when home buyers put down less than 20% as a down payment on their home.
Who Should Consider Choosing an FHA Loan?
- First-time home buyers
- Home-buyers without good credit scores or who are concerned about qualifying for a loan
- Those with little or no down-payment available
- Home buyers who want to keep their monthly payments as low as possible
Benefits of an FHA Loan
- Smaller down payment: FHA-insured loans currently have a 3.5% down payment rate. In some cases, when combined with another type of loan, there could be a zero down payment option.
- Mortgage insurance is funded into the loan: a premium of 1.5% is added to the loan balance, which in most cases will be paid out over the life of the mortgage, rather than up front and out-of-pocket
- Allowable debt-ratio limits are higher than those for conventional loans.
- No prepayment penalty.
- Fewer required repairs: today's FHA repair requirements are much less strict than they were in the past. Home buyers should keep in mind that an FHA appraisal does not take the place of a home inspection, thus buyers should still obtain a professional home inspection when considering a home purchase.
Types of FHA Loans
Fixed-Rate Loans
The most common type of FHA loan. The advantage of the fixed-rate mortgage is that the interest rate stays the same throughout the loan term, so home buyers will always know what their monthly bill will be.
Adjustable Rate Loans
With FHA's adjustable rate mortgage (ARM), the initial interest rates and monthly payments are low; however, as interest rates fluctuate, so does the interest rate of the ARM. The main advantage of choosing an adjustable rate mortgage is that home buyers are given a wider option to purchase higher-valued homes, due to the initial lower payments.
Purchase/Rehabilitation Loans
For homes that need a significant amount of repairs, the FHA offers a loan to rehabilitate and repair the home, called the SF Rehabilitation Loan Program (203k). This loan option combines the mortgage and cost of repairs.
Is an FHA Loan for Everyone?
An FHA-insured loan is suitable to a wide variety of home buyers. As with any large financial consideration, potential home buyers should consult a professional lender and/or mortgage broker to ensure they obtain the mortgage option most suitable to their needs.
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