Understanding the FHA loan
Many people especially those who are not very familiar with the real estate sector often wonder what an FHA loan is. FHA loan is one of the most popular mortgage loan products amongst borrowers who do find conventional mortgage loans very unattractive.
An FHA loan is a special mortgage loan backed by the United States Federal Housing Administration, otherwise known as the FHA. The loans granted by FHA are available through FHA-approved lenders.
Over the years, the government agency has extended this home financing option to individuals and families categorized as lower income earners. The program allows low-income earners to buy a suitable home for their families through the provision of a platform that provides them with the needed financial support.
History of FHA
The history of the FHA loan dates as far back as the 1930s during the Great Depression. As it is common with such economic conditions, the period witnessed a dramatic increase in the rate of foreclosures and defaults, as there was a reduction in the purchasing power of the people. The program was therefore launched to provide insurance to lending institutions, guaranteeing the security of their loans to a large extent. It subsequently managed several insurance loan programs.
The National Housing Act of 1934 made the creation of the FHA formal. It was initially introduced as a measure to stimulate the economy by increasing the rate and number of home construction projects and simultaneously reducing unemployment.
One of the major and notable impacts of the program since its inception is the remarkable increase in the number of Private Mortgage Insurance companies otherwise known as PMI’s. This development led to the modification of the Federal Housing Administration's goal. Currently, federal loans are majorly provided to support people who find it difficult to raise the required down payment or those who are not qualified for traditional loans from Private Mortgage Insurance companies.
The Federal Housing Administration is not charged with the responsibility of directly providing loans to families and individuals. The government agency only insures the loans provided by the private lenders. A MIP or Mortgage Insurance Premium must be paid for mortgage insurance to be acquired from federal programs. The amount of the premium is not constant as it varies depending on the loan amount.
When an intending borrower seeks housing loan from the federal government, the applicant is required to approach different lending institutions or mortgage brokers to determine whether they have been approved to participate in the program. It is usually advised that intending borrowers assess several institutions and compare their deals, as each lender offers the loan based on their specific rates and terms.
When lending institutions review loan applications, several factors are considered. One of the commonest factors considered by lending institutions is the debt-to-income ratio of the applicant. The analysis of this is done to determine the limit of funds that the borrower can naturally afford. In addition to analyzing the debt-to-income ratio of the prospective borrower, his monthly expenses are also considered in addition to the borrower’s payment histories.
The program has particularly helped first-time homebuyers who are approved for loans, as they can pay as low as 3.5 percent downpayment if they are eligible. They also get the chance to receive at least six percent towards their closing costs.
Another advantage of the FHA loan has to do with the levels of credit required from applicants. For applicants with minimal levels of credit or do not have at all, a blood relative can co-sign the loan even if the relative does not plan to live in the home. In such instance, the person is referred to as Non-Owner-Occupied Co-Borrower.
An FHA loan is one of the most important home financing products, and it is imperative that everyone especially lower-income families know about the loan and the means of benefitting from this platform created by the government.
The platform is designed for United States citizens to live their dreams of becoming homeowners by providing the needed support, especially in financial terms.
The FHA loans can be easily assessed but in most cases, require the knowledge and expertise of real estate agents and professionals that are familiar with the process of obtaining one.
