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More than a Mortgage: FHA Loans Help Build Credit History

Richard Barrington
LoanBiz Columnist

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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.

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