WHAT IS AN FHA LOAN?
The Federal Housing Administration first began issuing home loans during Franklin Roosevelt's administration during the 1930s. With the Depression raging around them, those wishing to purchase homes, or even to hang on to homes they already had, despaired at the prospects of qualifying for loans. The FHA was one of Roosevelt's programs to help dispel some of that despair. Nowadays, the FHA is part of the Department of Housing and Urban Development.
FHA loans are similar to regular mortgages, but they come from the government rather than from a bank or other lending institution. As of June 1, 2022 the prime lending rate in the United States is .25 percent. The current rate for FHA 30-year mortgages is 5.69 percent. The APR for FHA loans is 5.75 percent. Because the lending criteria are less than for a standard mortgage, the interest rate tends to be higher. Banks may offer prime minus 1.5 percent, but they will have much more stringent guidelines.
Borrowers who have FHA loans will have to have mortgage insurance, too, which is an additional cost. The big advantage of such a loan is that the insurance protects the lender andthe borrower. If a borrower defaults, the insurance gives the borrower a couple of options. First, it gives the borrower a period of time, which varies by state, to come up with the payments in arrears. If the borrower does this, then no further action is taken.
Borrowers may also use the FHA's pre-foreclosure sales program. A borrower in default who can't come up with the payments in arrears has a certain amount of time, which also varies by state, to sell the home to fulfill the debt. Under FHA rules, the sale of the home fulfills the debt even if the borrower doesn't get the full amount of the debt in the sale. The FHA covers the rest. If the borrower goes this route, there is no foreclosure on the borrower's credit, and the borrower is free and clear. Also, if the borrower decides to downsize to a smaller, more affordable home, the borrower can still get another FHA loan for that purchase.
If the borrower lets the debt proceed to foreclosure, that will have lasting consequences. For example, the borrower's credit will take a big hit, and the borrower also won't qualify for an FHA loan again for three years. The bad credit will hamper the borrower's attempts to find other housing, as well, so it is alwaysadvisable to participate in the pre-foreclosuer sales program if the borrower cannot get the funds together for the payments in arrears.
When it comes to qualifying for the loan, borrowers don't need as high a credit score as they would for a normal mortgage. They also don't need to put down as much money to get started. For any bank to look at a borrower for loan, that person's credit score would have to be higher than 619. Realistically, however, most banks won't lend to people with a score lower than 700, particularly if they are conservative in their lending practices.
When asking, "What is an FHA Loan?" it's crucial to remember that the government will lend to anyone whose credit score is 500 or higher. Of course, the closer to 500 the person's credit score is, the more the person will have to put down and the higher the interest rate the person will have to pay.
People who can afford large down payments, who have solid credit scores, or both, would be better off in almost all cases going the route of a traditional mortgage. FHA loans are for prospective homeowners who may not meet all the criteria for a traditional mortgage. That doesn't mean that they're locked in forever, however. If a person's financial situation changes for the better, they can usually refinance what they owe. Conversely, people who have bad luck can contact the FHA to refinance what they owe to their bank or other lender.
In all cases, it's usually best to speak with a mortgage adviser and the FHA before signing any mortgage documents. The laws and procedures around mortgages are positively Byzantine, and it's easy to go awry. By finding out everything possible from top professionals, borrowers can give themselves the best possible chance to get the right mortgage.