What is an FHA Loan?

- Anita J.

In 1934, The Federal Housing Authority was established to aid people in buying a home during a time that the nation was deep in an economic depression. It is still around today helping the average American pursue their dream of owning a home. The Federal Housing Authority became a branch of the Department of Housing and Urban Development in 1965.

What most people do not understand is that FHA does not give them a loan or even guarantee they can get a loan. It does insure the loan, this lets private lenders know that some of the money they loan to an individual will be paid by the FHA if the person borrowing the money defaults on the loan. Normally this type of loan was for individuals that were unable to pay the 20 percent down that was needed to purchase a home. Today, the FHA has a cap on the insured loan, which is at the time of this writing $417,000. If the loan is higher than this amount, it is issued without the benefit of federal insurance along with a higher interest rate.

FHA mortgage limits changed in the 1990’s by falling behind in the price of home values. Because of this, many people shied away from FHA home loans and searched out adjustable rate mortgage loans that would give the person 100% financing for amount much higher than the FHA cap.

Today, many people are now returning to FHA home loans since they now realize the problems with adjustable rate mortgages and the fact that the numbers are going up for the FHA cap.

A FHA home loan is great for people that may not have perfect credit, as their credit report is not an issue. A matter of fact, individuals that have filed bankruptcy can even receive a FHA home loan within two years after filing for bankruptcy. If a person has had a foreclosure on their credit, they can also purchase a home with a FHA home loan as long as they have a clean report for three years after the foreclosure.

Interest rates on FHA loans are close to the same rates as a conventional loan. Mortgage insurance will be written into the premium payment, but on the bright side, it is normally cheaper than commercial private mortgage insurance.

With an FHA home loan, the borrower can finance up to 90 percent of the purchase price of the home.

The biggest problem a borrower may run into is that FHA has standards set for the condition of the home and many people believe that their standards are quite extreme. When you are going through the loan process, not only will the home be inspected by a professional appraiser, but a FHA agent will also inspect the home.