FHA loan

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FHA loan is a federal assistance mortgage loan in the United States insured by the Federal Housing Administration. The loan may be issued by federally qualified lenders.

FHA loans have historically allowed lower income Americans to borrow money for the purchase of a home that they would not otherwise be able to afford. The program originated during the Great Depression of the 1930s, when the rates of foreclosures and defaults rose sharply, and the program was intended to provide lenders with sufficient insurance. Some FHA programs were subsidized by government, but the goal was to make it self-supporting, based on insurance premiums paid by borrowers.

Over time, private mortgage insurance (PMI) companies came into play, and now FHA primarily serves people who cannot afford a conventional down payment or otherwise do not qualify for PMI insurance.

Contents

[edit] How to Obtain an FHA Loan

FHA does not make loans. Rather, it insures loans made by private lenders. The first step in obtaining an FHA loan is to contact several lenders and or mortgage brokers, and ask them if they originate FHA loans. As each lender sets their own rates and terms, comparison shopping is important in this market.

When you begin to seriously consider purchasing a new home it is important that you follow some simple steps to make sure that the process runs smoothly.

The first thing you should do is an analysis of your debt to income ratio. This important step will let you know what type of home you can afford based on your monthly income and expenses.

The next important step in purchasing a new home is to get pre-approved for a home loan. The peace of mind that comes with knowing that your mortgage loan and credit report have been approved will allow you to shop for your new home with confidence. And when you find a home and are ready to make an offer the fact that you have already been pre-approved for your loan amount will give the seller confidence in you as a buyer.

Section 251 insures home purchase or refinancing loans with interest rates that may increase or decrease over time, enabling consumers to purchase or refinance their home at a lower initial interest rate.

FHA's mortgage insurance programs help low- and moderate-income families become homeowners by lowering some of the costs of their mortgage loans. FHA mortgage insurance also encourages lenders to make loans to otherwise creditworthy borrowers and projects that might not be able to meet conventional underwriting requirements, protecting the lender against loan default on mortgages for properties that meet certain minimum requirements -- including manufactured homes, single and multifamily properties, and some health-related facilities. The basic FHA mortgage insurance program is Mortgage Insurance for One- to Four-Family Homes (Section 203(b)).

[edit] The Adjustable Rate

FHA administers a number of programs, based on Section 203(b), that have special features. One of these programs, Section 251, insures adjustable rate mortgages (ARMs) which, particularly during periods when interest rates are high, enable borrowers to obtain mortgage financing that is more affordable by virtue of its lower initial interest rate. This interest rate is adjusted annually, based on market indices approved by FHA, and thus may increase or decrease over the term of the loan. In 2006 FHA received approval to offer hybrid ARMs, in which the interest is fixed for the first 3 or 5 years, and is then adjusted annually.

[edit] Down Payment Grants

Down payment assistance and community redevelopment programs offer affordable housing opportunities to first-time homebuyers, low-income and moderate-income individuals and families who wish to achieve homeownership. Grant types include seller funded programs such as HART, Nehemiah, Ameridream, Partners in Charity, and others, as well as programs that are funded by the federal government, such as the American Dream Down Payment Initiative, or local governments, often using mortgage revenue bond funds.

The IRS has called the seller funded FHA downpayment assistance (DPA programs) a "scam" http://www.dpanews.com/news-about-down-payments/irs-revenue-ruling-to-end-seller-funded-dpa-scam/ and has ruled that organizations such as AmeriDream and Partners in Charity are no longer eligible for non-profit status as defined by the IRS. This ruling was based largely on the circular nature of the cash flows in the seller funded programs, in which the "grant" was rolled into the price of the home, and financed with FHA insurance, leading to the "grant" being paid back to the donor, and higher foreclosure rates for these mortgages, as documented by the US Government Accountability Office http://www.gao.gov/new.items/d0624.pdf This ruling will eliminate seller funded programs from providing down payment assistance. It is expected that the IRS will pull the statuses of these firms during 2006.

[edit] External links

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