More than a Mortgage: FHA Loans Help Build Credit History
Richard BarringtonLoanBiz Columnist
At a time when lending standards are being tightened and
the government is anxious for ways to restore the public's spending power, FHA
loans will play a more important role than ever. For many Americans, they may
represent the best hope of becoming a homeowner under current conditions, and
may also help support the economy at large.
Get Credit with an FHA Loan
Since FHA loans are home mortgages
it is obvious that they help bolster the housing market, but their economic
impact goes beyond that. They can also help people establish a credit history,
which may increase consumer demand in the long run. At the individual level,
this means giving people the financial flexibility that comes with access to
credit.
The FHA Loan Program
FHA loans are administered by the
Federal Housing Administration (FHA). The FHA does not make FHA loans, but
rather it insures loans made by lenders to qualified borrowers. In fact, the
FHA is the largest mortgage insurer in the world.
FHA loans help people who might
otherwise have difficulty in getting a mortgage. They do this in three ways:
- By allowing people to
buy a house with little or no down payment, FHA loans make homeownership
possible for people who have a steady income, but have not yet built up a large
base of savings.
- By insuring the loans,
the FHA gives lenders the confidence to make loans to people who haven't
established a strong credit history.
- FHA loan rates are
often lower than they would be without the FHA insurance. FHA loan rates are
set by the market, so borrowers can still shop around, but in general the
insurance reduces the risk premium lenders would normally demand.
Benefits beyond Getting the Mortgage
While all of the above is designed
to help new or less affluent entrants into the housing market, it has broader
benefits as well. One benefit is simply helping people establish a credit
history. Especially at a time like now, when lenders are shying away from
higher-risk borrowers, FHA insurance gives those lenders the confidence to
extend mortgages to people without a long-established credit history. Access to
credit has to start somewhere, and an FHA loan can be the first step to
establishing a credit history that will open other doors for the borrower in
the future.
Also, since FHA loan rates are
likely to be lower than uninsured rates for high-risk borrowers, FHA loans
allow people to enter the housing market without completely overwhelming their
budgets. The lower the rates are, the more likely people are to keep up with
their monthly payments and still afford other necessities.
Learning to Use Credit Wisely
In short, FHA loans can help
people get credit, even with the recent mortgage crisis still hanging over the
real estate industry. FHA mortgages provide support for a soft housing market
and help new homeowners learn to use credit wisely.
Source:
Federal
Housing Administration
About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.
