FHA loan is a federal assistance
mortgageA mortgage is the transfer of an interest in property to a lender as a security for a debt - usually a loan of money. While a mortgage in itself is not a debt, it is the lender's security for a debt...
loan in the
United StatesThe United States of America is a federal constitutional republic comprising fifty states and a federal district...
insured by the
Federal Housing AdministrationThe Federal Housing Administration is a United States government agency created as part of the National Housing Act of 1934. The goals of this organization are: to improve housing standards and conditions; to provide an adequate home financing system through insurance of mortgage loans; and to...
. The loan may be issued by federally qualified lenders.
FHA loans have historically allowed lower income
AmericanThe United States of America is a federal constitutional republic comprising fifty states and a federal district...
s to borrow money for the purchase of a home that they would not otherwise be able to afford. The program originated during the
Great DepressionThe Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
of the 1930s, when the rates of
foreclosureForeclosure is the legal and professional proceeding in which a mortgagee, or other lien holder, usually a lender, obtains a court ordered termination of a mortgagor's equitable right of redemption. Usually a lender obtains a security interest from a borrower who mortgages or pledges an asset like...
s and defaults rose sharply, and the program was intended to provide lenders with sufficient
insuranceInsurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium, and can be thought of as a guaranteed and known...
.
FHA loan is a federal assistance
mortgageA mortgage is the transfer of an interest in property to a lender as a security for a debt - usually a loan of money. While a mortgage in itself is not a debt, it is the lender's security for a debt...
loan in the
United StatesThe United States of America is a federal constitutional republic comprising fifty states and a federal district...
insured by the
Federal Housing AdministrationThe Federal Housing Administration is a United States government agency created as part of the National Housing Act of 1934. The goals of this organization are: to improve housing standards and conditions; to provide an adequate home financing system through insurance of mortgage loans; and to...
. The loan may be issued by federally qualified lenders.
FHA loans have historically allowed lower income
AmericanThe United States of America is a federal constitutional republic comprising fifty states and a federal district...
s to borrow money for the purchase of a home that they would not otherwise be able to afford. The program originated during the
Great DepressionThe Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
of the 1930s, when the rates of
foreclosureForeclosure is the legal and professional proceeding in which a mortgagee, or other lien holder, usually a lender, obtains a court ordered termination of a mortgagor's equitable right of redemption. Usually a lender obtains a security interest from a borrower who mortgages or pledges an asset like...
s and defaults rose sharply, and the program was intended to provide lenders with sufficient
insuranceInsurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium, and can be thought of as a guaranteed and known...
. Some FHA programs were subsidized by the government, but the goal was to make it self-supporting, based on insurance premiums paid by borrowers.
Over time, private mortgage insurance (PMI) companies came into play, and now FHA primarily serves people who cannot afford a conventional down payment or otherwise do not qualify for PMI.
On August 31, 2007, the FHA added a new refinancing program called
FHA-SecureFHA-Secure is a Federal Housing Administration refinancing program to help borrowers avoid foreclosure. It is similar to other FHA loan. FHASecure is a refinancing option that gives homeowners with non-FHA adjustable rate mortgages , current or delinquent and regardless of reset status, the ability...
to help borrowers hurt by the 2007 subprime mortgage financial crisis.
The history of FHA loans
The National Housing Act of 1934 created the
Federal Housing AdministrationThe Federal Housing Administration is a United States government agency created as part of the National Housing Act of 1934. The goals of this organization are: to improve housing standards and conditions; to provide an adequate home financing system through insurance of mortgage loans; and to...
(FHA), which was established primarily to increase home construction, reduce unemployment, and operate various loan insurance programs. The FHA makes no loans, nor does it plan or build houses. As in the Veterans Administration's
VA loanA VA loan is a mortgage loan in the United States guaranteed by the U.S. Department of Veterans Affairs. The loan may be issued by qualified lenders....
program, the applicant for the loan must make arrangements with a lending institution. This financial organization then may ask if the borrower wants FHA insurance on the loan or may insist that the borrower apply for it. The federal government, through the Federal Housing Administration, investigates the applicant and, having decided that the risk is favorable, insures the lending institution against loss of principal in case the borrower fails to meet the terms and conditions of the mortgage. The borrower, who pays an insurance premium of one half of 1 percent on declining balances for the lender's protection, receives two benefits: a careful appraisal by an FHA inspector and a lower interest rate on the mortgage than the lender might have offered without the protection.
Until the latter half of the 1960s, the Federal Housing Administration served mainly as an insuring agency for loans made by private lenders. However, in recent years this role has been expanded as the agency became the administrator of interest rate subsidy and rent supplement programs. Important subsidy programs such as the
Civil Rights Act of 1968On April 11, 1968 President Lyndon Johnson signed the Civil Rights Act of 1968 , which was meant as a follow-up to the Civil Rights Act of 1964. While the Civil Rights Act of 1866 prohibited discrimination in housing, there were no federal enforcement provisions...
were established by the
United States Department of Housing and Urban DevelopmentThe United States Department of Housing and Urban Development, also known by as HUD, is a Cabinet department in the Executive branch of the United States federal government...
.
In 1974 the
Housing and Community Development ActHousing and Community Development Act, the name of several United States federal laws, may refer to:*Housing and Community Development Act of 1974*Housing and Community Development Act of 1977*Housing and Community Development Act of 1980...
was passed. Its provisions significantly altered federal involvement in a wide range of housing and community development activities. The new law made a variety of changes in FHA activities, although it did not involve (as had been proposed) a complete rewriting and consolidation of the
National Housing ActNational Housing Act may refer to:* National Housing Act * National Housing Act of 1934 in the USA...
. It did, however, include provisions relating to the lending and investment powers of federal savings and loan associations, the real estate lending authority of national banks, and the lending and depositary authority of federal credit unions.
Further changes occurred in the 1977 Housing and Community Development Act, which raised ceilings on single-family loan amounts for savings and loan association lending, federal agency purchases, FHA insurance, and security for Federal Home Loan Bank advances. In 1980 the Housing and Community Development Act was passed; it permitted negotiated interest rates on certain FHA loans and created a new FHA rental subsidy program for middle-income families.
On March 6, 2008, the "FHA Forward" program was initiated. This is the part of the stimulus package that President Bush had in place to raise the loan limits for FHA.
How to obtain an FHA loan
FHA does not make loans. Rather, it insures loans made by private lenders. The first step in obtaining an FHA loan is to contact several lenders and/or
mortgage brokerA mortgage broker acts as an intermediary who sells mortgage loans on behalf of individuals or businesses.Traditionally, banks and other lending institutions have sold their own products. However as markets for mortgages have become more competitive, the role of the mortgage broker has become more...
s and ask them if they originate FHA loans. As each lender sets its own rates and terms, comparison shopping is important in this market.
Second, the potential lender assesses the prospective home buyer for risk. The analysis of one's debt to income ratio enables the buyer to know what type of home can be afforded based on monthly income and expenses and is one risk metric considered by the lender. Other factors, e.g. payment history on other debts, are considered and used to make decisions regarding eligibility and terms for a loan.
Section 251 insures home purchase or refinancing loans with interest rates that may increase or decrease over time, which enables consumers to purchase or refinance their home at a lower initial interest rate.
FHA's mortgage insurance programs help low- and moderate-income families become homeowners by lowering some of the costs of their mortgage loans. FHA mortgage insurance also encourages lenders to make loans to otherwise credit-worthy borrowers and projects that might not be able to meet conventional underwriting requirements, protecting the lender against loan default on mortgages for properties that meet certain minimum requirements—including manufactured homes, single and multifamily properties, and some health-related facilities. The basic FHA mortgage insurance program is Mortgage Insurance for One- to Four-Family Homes (Section 203(b)).
FHA allows first time homebuyers to put down as little as 3% and receive up to 6% towards closing costs. If little or no credit exists for the applicants, the FHA will allow a blood relative, such as Mom or Dad, to co-sign for the loan without requiring them to reside in home with first time homebuyer. This is called a Non-Owner-Occupied Co-Borrower. Depending on the state you reside in, you may receive a discount on your State Transfer Taxes at settlement.
Required Documentation For FHA Loans
- A two year history of employment in the same field is required
- If you are a recent college graduate, your last two years of schooling can be used if you are currently working in your field of study
- Credit Scores normally need to be above 620 for Conventional financing-580 for FHA and VA looks at a case by case basis
- If no credit history exists-you may use cell phone bill, cable bill, previous rental history, etc. to establish a “pattern” of good credit payments
- Proper ID as defined by the Patriot Act (State Driver’s License or Birth Certificate along with a copy of your Social Security card required)
- Debt Ratios should be below 36/46
The adjustable rate
FHA administers a number of programs, based on Section 203(b), that have special features. One of these programs, Section 251, insures adjustable rate mortgages (ARMs) which, particularly during periods when interest rates are low, enable borrowers to obtain mortgage financing that is more affordable by virtue of its lower initial interest rate. This interest rate is adjusted annually, based on market indices approved by FHA, and thus may increase or decrease over the term of the loan. In 2006 FHA received approval to allow hybrid ARMs, in which the interest is fixed for the first 3 or 5 years, and is then adjusted annually according to market conditions and indices.
Down payment grants
Down payment assistance and community redevelopment programs offer affordable housing opportunities to first-time homebuyers, low- and moderate-income individuals, and families who wish to achieve homeownership. Grant types include seller funded programs, the
http://www.fhadpa.comGrant America Program and others, as well as programs that are funded by the federal government, such as the American Dream Down Payment Initiative, or local governments, often using mortgage revenue bond funds.
On May 27, 2006, the IRS issued Revenue Ruling 2006-27, categorizing the non-profit seller funded down payment assistance programs (DPA programs) as "scams." The IRS ruled that organizations such as AmeriDream and Partners in Charity are no longer eligible for non-profit status and are not acting as "charitable organizations" as defined by the IRS. This ruling was based largely on the circular nature of the cash flows, in which the seller pays the charity a "fee" after closing. Many believe that the "grant" is really being rolled into the price of the home. According to the
Government Accountability OfficeThe Government Accountability Office is the audit, evaluation, and investigative arm of the United States Congress. It is located in the legislative branch of the United States government....
, there are higher default and foreclosure rates for these mortgages.
On October 31, 2007, the Department of Housing and Urban Development adopted new regulations to ban so-called "seller-funded" down payment programs. The new regulations state that all organizations providing down payment assistance reimbursed by the property seller "before, during, or after" that sale must cease providing grants on FHA loans by October 30, 2007, with the exception of the Nehemiah Corporation. Nehemiah is the beneficiary of a lawsuit settlement with Department of Housing and Urban Development in April 1998. The terms of that settlement will allow Nehemiah to operate until April 1, 2008. Ameridream was granted an extension to the new regulations until February 29, 2008.
Several similarly operated government grant program were introduced in response to the IRS Revenue Ruling in May 2006. Their governmental status made them exempt from the IRS Ruling, but they are still affected by the HUD Rule Change. One such organization was The Grant America Program, which was conducted by the Penobscot Indian Nation and had been available to all homebuyers in all fifty states.
Private mortgage insurance
Private mortgage insurance (PMI) guarantees home mortgage loans that are conventional, that is, non-government loans. This private business loan program is equivalent to the
FHAFHA may mean:* Federal Housing Administration. See also FHA loan.* Civil Rights Act of 1968 -- In particular, Title VIII of the Act, also known as the Fair Housing Act* Forced Hot Air heating* Future Homemakers of America* Functional hazard analysis...
and the
VA loanA VA loan is a mortgage loan in the United States guaranteed by the U.S. Department of Veterans Affairs. The loan may be issued by qualified lenders....
programs.
The PMI company insures a percentage of the consumer's loan to reduce the lender's risk; this percentage is paid to the lender if the consumer does not pay and the lender forecloses the loan.
Lenders decide if they need and want private mortgage insurance. If they so decide, it becomes a requirement of the loan. PMI companies charge a fee to insure a mortgage loan; the VA insures a loan at no cost to a veteran buyer (if the veteran has a service connected disability, otherwise the veteran pays a fee for the loan guarantee); the FHA charges a fee to guarantee the loan.
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