|In 1934, the federal government established the Federal Housing Authority (FHA). The FHA was not created to actually lend money; rather, it was created to insure the loans made by approved lenders, such as W.J. Bradley, and to protect the lenders against defaults on the loans.
If a borrower obtains an FHA loan and then defaults on it, the lender is compensated by FHA, and thus the lender will not lose as much money and is therefore more willing to lend according to FHA guidelines.
Originally considered a program mainly for first-time buyers, FHA loans are now one of the most popular types of loans for all types of borrowers due to a variety of attractive features:
- Low down payment. FHA loans let new buyers put down as little as 3.5 percent of the home’s purchase price. Gift funds may be used for the down payment, which means you may not need to come up with any cash at all.
- Market-appropriate loan limits. For many years, FHA loans had very low maximum loan limits. But in 2007 the FHA raised its loan limits to equal the median home price in your market.
- Lower credit requirements. While there are no set credit requirements, it’s best to contact me to determine if your credit history along with other factors will qualify you for an FHA loan.
- Low up-front mortgage insurance rate. The FHA requires mortgage insurance to protect itself from loan defaults, but premiums are only 1 percent of the loan amount. The premium can be paid directly by the borrower or rolled into the loan amount.
In the past FHA loans were considered “risky” or too much trouble for lenders, with strict regulations and requirements that had to be met before an FHA loan would be approved. Borrowers who applied for an FHA loan were also sometimes considered high-risk, because usually they would not qualify for conventional funding. Relaxed guidelines combined with the state of the market have taken the stigma off of these loans and made them a great choice for nearly any borrower.
While FHA loans offer less stringent terms than you would find with conventional loan requirements, they are also designed to ensure responsible homeownership. FHA loans impose ratios on borrowers’ debts in relation to their income. The FHA also requires you to pay 1% of the loan amount as an upfront mortgage insurance premium. In addition, annual mortgage insurance payments are also required, divided into monthly payments of 1.10% to 1.15% for 30-year loans, according to the loan-to-value ratio.
If you’re looking to purchase a new home or refinance a current mortgage, but are worried you don’t have enough for a down payment or that your credit is too low, remember that FHA loans may present a perfect option.