The Federal Housing Authority (FHA) does not make loans. An FHA loan is instead a loan from a bank or other lending institution that is insured by the FHA. People who otherwise could not afford a new home, such as first-time homebuyers and seniors on limited incomes, typically use the loans. There is a fee for the loan that typically equals one percent of the loan and is paid as part of the monthly payment.
Benefits
FHA home loans offer protection and access for people with less than stellar credit. Homebuyers can purchase a home with little or no down payment, and often qualify for an FHA loan when they could not qualify for a conventional mortgage. According to the U.S. Department of Housing and Urban Development (HUD), because the federal government guarantees the loan, homebuyers can qualify for lower interest rates.
Features
Other features that are provided by an FHA-insured loan include the origination of the down payment. For conventional mortgages, the down payment must come from the personal savings of the homebuyer. The down payment on an FHA loan, on the other hand, can be a gift or personal loan. Money can come from a charitable organization, family member or employer.
Requirements
There are requirements that homebuyers must meet before gaining approval for an FHA-backed mortgage. Rules and regulations governing FHA loans vary at times, and exceptions are often included to stimulate the economy. In 2009, consultants at the Home Buying Institute reported that a borrower's credit score must be 620 or higher. Most people need to put down an average of 3.5 percent on the purchase, and the size of the loan may be limited.
Types
The FHA insures a variety of home loans. The most common is a fixed-rate loan that offers a set rate of interest and monthly payments. An adjustable rate loan is popular with first-time homebuyers. An adjustable mortgage increases an average of one or two percent and settles on a predetermined maximum interest rate, usually about six percent higher than the initial rate. There is also an FHA loan designed to cover homes that need substantial improvements. The loan covers the costs of the property as well as the money needed to fix it up.
Expert Insight
Consultants at the Home Buying Institute report that many people are intimidated by the paperwork involved in obtaining an FHA loan and the mortgage process. Instead, potential homeowners should begin the process and at least learn about the steps required to own a home. Even if they eventually are denied an FHA loan, borrowers can find out what they need to do to qualify in the future.
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