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How an FHA Loan Can Be a Gateway to Home Ownership

Richard Barrington
LoanBiz Columnist

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Borrowers whose dreams of home ownership have been denied by the recent mortgage crisis should check to see if they are eligible to apply for an FHA loan. For over seventy years FHA loans have helped Americans join the ranks of homeowners for the first time. FHA loans remain available despite the subprime mortgage crisis, and in fact may be more valuable than ever because of it.

FHA stands for the Federal Housing Administration, a U.S. government agency which is the world's largest insurer of mortgages. Home buyers handicapped by modest savings and income should check to see if they are eligible to apply for an FHA loan when shopping for a mortgage.

Who Benefits from FHA Loans

Would-be homeowners who wish to apply for an FHA loan must meet these criteria:

  • Be a legal resident of the U.S. (full U.S. citizenship is not required)
  • Have a valid social security number
  • Be of legal age to sign a contract in their state

Beyond that, FHA lenders will look at the borrower's credit history, income, and savings. They will want to be sure that the house is affordable and that the property meets their standards. The difference is that with FHA loans, lenders don't use a credit score to approve or decline a mortgage; they look at the actual credit history and will take into account circumstances such as the loss of a job or a medical problem that caused missed payments. Even a bankruptcy doesn't necessarily prevent someone from getting an FHA home loan. FHA loans also require less money down--as little as 3% of the purchase price.

How It Works

The way this works is that lenders can apply less stringent standards to an FHA loan application because that loan is insured by the FHA. In other words, it isn't just the borrower and the collateral value of the home standing behind the loan--the federal government backs it as well. Over the course of its history, the FHA has insured over 34 million mortgages.

To make this possible, all FHA borrowers pay FHA mortgage insurance, which adds a small premium to the monthly mortgage payment. It is certainly possible that home buyers with great credit histories and substantial savings and incomes could obtain a mortgage more cheaply without this premium. However, for the many would-be homeowners who don't have that luxury, an FHA loan may be their best pathway to home ownership.

Applying for an FHA Loan

It is easy to apply for an FHA loan, because borrowers don't have to work through the government. Many conventional lenders are authorized to make FHA loans. The FHA doesn't set mortgage rates--it merely insures certain loans that independent lenders make. Therefore, it is still important to shop around to see which lender can provide the best terms on an FHA loan.

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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