How an FHA Loan Can Be a Gateway to Home Ownership
Richard BarringtonLoanBiz Columnist
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.
