Federal Housing Administration (FHA) loans provide a way for homeowners to purchase new homes without large down payments. The FHA provides mortgage insurance to banks and lenders, enabling them to offer home loans to consumers that feature lower down payment amounts and closing costs. While anyone can apply for an FHA loans, the loans are targeted to first-time homeowners who may have difficulty raising the funds needed to purchase a home.
History
The FHA was created in 1934, when the housing industry was in a significant slump. At that time, new home purchases required a 50 percent down payment and repayment of the loan within three to five years, making home ownership out of reach for many people. According to the FHA, only four in 10 households owned their own homes at that time. Complicating the situation was the state of the economy. During the depression, the home building industry suffered a serious decline that left 2 million construction workers jobless. In addition to lowering costs for prospective homeowners, the new FHA also created jobs for the construction industry. The FHA is part of the Department of Housing and Urban Development today.
Features
Borrowers interested in obtaining for an FHA loan apply for the loan through a bank or lending company. Because the loan is insured, lenders can be more flexible when considering income or negative aspects of a potential borrowers credit history. Once the loan is approved, borrowers make monthly payments directly to the bank or lending company that approved the loan.
Considerations
Borrowers can qualify for an FHA loan with a down payment that can be as low as 3.5 percent of the total cost of the home. Traditional mortgage loans may require a 10 to 20 percent down payment. Points may also be assessed at closing. A point equals one percent of the mortgage value.The total amount of the FHA mortgage you may obtain varies depending on where you live in the United States. HUD offers a Mortgage Limits Calculator that will help you determine this number.
Private Mortgage Insurance
Your mortgage will include a payment for private mortgage insurance (PMI) to help cover the cost of the loan should you stop making payments. When you have paid more than 20 percent of the mortgage, you can stop making these payments, although you must contact your lender and ask that the payments be discontinued.
Eligibililty
While there is more flexibility in approving FHA loans, you must still meet certain eligibility guidelines. Your lender will verify your income, debt load, credit history and assets before approving a loan. In order to be approved, you must be a legal U.S. resident, have a Social Security number and be old enough to legally hold a mortgage.
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