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FHA Loans
FHA Loans
The Federal Housing Administration (FHA) was created by Congress in 1934 in response to "The Great Depression." As a mortgage insurer the FHA guarantees that mortgages will be paid back by paying lenders for foreclosed mortgages. Despite its ties with the Federal Government the FHA operates independently by charging borrowers a mortgage insurance that is worked into their mortgage. Loan options that are offered by the FHA include:
- Fixed Rate Mortgages - The FHA Insured Fixed Rate Mortgage is the most widely used. It's a Traditional 30 Year Mortgage with lighter qualification requirements. This type of loan is the most widely used FHA approved loan because borrowers always know what their payment is going to be.
- Adjustable Rate Mortgages (ARMs) - Adjustable Rate Mortgages approved by the FHA usually incorporate a low initial payment. The interest rate is computed using the 1 Year Constant Maturity Index (most commonly used). Unlike private Adjustable Rate Mortgages the interest rate on FHA approved ARMs don't raise more than 1 or 2% within a 1 year period.
- Purchase/Rehabilitation Loans - FHA Insured Purchase/Rehabilitation Loans are a part of FHA's SF Rehabilitation Loan Program (203k) and are for "fixer uppers." The cost to fix the home is incorporated into the loan and determines how much the loan can be written for. Typically, the loan amount is calculated by appraising the future value of the home once it is fixed up.
- Indian Reservation and Restricted Land Loans - Indian Reservation and Restricted Land Loans backed by the FHA are part of FHA Section 248. This is a special type of loan because the borrower doesn't necessarily own the land the home is on, the tribe does. In this situation the borrower needs to furnish a lease from the tribe. The tribe, on the other hand, needs to certify that it has (and enforces) eviction procedures, identify a court that handles cases filed on the reservation, allow FHA representatives onto tribal property to serve evictions on FHA foreclosures, agree to use the FHA prescribed lease form and enact ordinances (or accept state laws) that give the FHA priority of liens against the property.
FHA Insured Loans are especially beneficial for those who are first time homebuyers, who want to keep monthly payments low, those who worry about payments going up, who wouldn't be able to qualify for a mortgage otherwise or those who don't have good credit. The FHA and FHA Insured Loans are great for those just starting out or those facing some sort of economic hardship. Borrowers who take out FHA Loans have the benefits of:
- Lower Costs - Since mortgages are insured lenders face less interest risk and are more willing to accept a lower margin, making the interest on the loan lower than it would normally be.
- Smaller Down Payment - FHA Insured Loans typically only require a 3% down payment. This can come in the form of a gift from a family member, employer or charitable organization and recognized as such in tax statements.
- Easier Qualification - Lenders have lighter restrictions on FHA Insured Loans because they are guaranteed payment in the event of a foreclosure. This is especially beneficial for those with a "not-so-good" credit rating. Even those who have previously had a bankruptcy can qualify for an FHA Insured Loan.