FHA Loan Introduction
The Federal Housing Administration (FHA) is a division of the Housing and Urban Development that provides loan insurance to families or individuals seeking a mortgage loan. An FHA backed loan allows the borrower, who may not qualify for a traditional mortgage, to obtain a loan through an approved FHA lender and purchase a home.
The FHA loan program does not fund loans, but instead guarantees your loan through an approved FHA lenders. Typical candidates to receive an FHA backed loan are low income families or individuals, first time homebuyers with little or no credit or borrowers who want to purchase distressed properties.
FHA Backed Loan Advantages
Borrowers seek an FHA backed loan because it offers an affordable mortgage program. Individuals who obtain an FHA loan have lower monthly mortgage payments and low or no closing costs which help the borrower establish financial security. Additionally, borrowers only need a down payment of 3% of the purchase price instead of the standard 20%.
On a larger scale, FHA backed loans have a positive impact on the economy. People who may not qualify for a traditional mortgage can turn to the FHA for assistance to purchase their home, which helps to stimulate the housing market. Additionally, distressed homes or properties in need of renovation are rejuvenated thanks to an FHA backed loan, which positively impacts overall home values in the neighborhood.
For the lender, an FHA backed loan means safety and security. Even if the borrower defaults on the loan, the FHA will pay the loan balance and foreclosure is avoided.
FHA Loan Types
One size doesn’t fit all. That’s why the FHA has several loan products to meet a variety of needs:
HUD 203 (b)
The HUD 203 (b) mortgage program provides loan insurance for first time homebuyers or for individuals who may not have an adequate down payment or credit to qualify for a traditional mortgage. This loan is only to be used to purchase or refinance a primary residence.
To qualify for this mortgage insurance, the borrower must meet standard FHA qualifications along with being able to prove that they have sufficient income to make monthly payments and a satisfactory credit score.
HUD 203 (k) Rehabilitation Program
This type of mortgage insurance applies to the purchase and renovation of distressed properties. Borrowers need a down payment of at least 3.5% for the purchase and repair of the home.
The lender will conduct a property appraisal to determine the home’s value and calculate the loan amount based on the purchase price plus the cost of estimated renovations. Once the seller is paid at closing, the remainder of the money goes into an escrow account to be used for repairs and renovation. 10% of each draw is retained by the lender to guarantee that the job is finished. The borrower receives the remainder of the money once there are no property liens.
Home Equity Conversion Mortgage (HECM)
One of the first reverse mortgage products on the market, HECM allows senior homeowners to convert the equity in their homes into cash. Seniors use this program for a variety of reasons such as paying for mounting medical care, making home improvements or backing up social security payments.
Qualified borrowers must be at least age 62, own and reside in the home and have a low mortgage balance that can be paid off at closing. Single family residences and HUD approved manufactured homes and condominiums qualify for this program.
The amount of money you can retrieve from your home depends on your age, mortgage interest rate and your home’s appraised value.
FHA Energy Efficient Mortgages (EEM)
Homeowners who want to make their home energy efficient may qualify for an EEM. Eligibility requirements are the same as for the 203 (b) mortgage insurance and the program is available for both new and existing homes throughout the country.
“Let FHA Loans Help You.” U.S. Department of Housing and Urban Development. 16 July 2009.
“Do You Qualify for an FHA Loan?” FHA Qualification