An FHA loan is essentially
a mortgage loan insured by US Federal Housing Administration. It is a type of federal assistance and have
historically allowed lower-income Americans to borrow money from FHA-approved
lenders for the purchase of a home that they would not otherwise be able to
afford. The money for an FHA mortgage
loan is not given to borrowers by the FHA, rather, borrowers receive funds
from an FHA-approved lender, and the FHA
guarantees the loan to minimize the risk of loss to the
lender if the borrower defaults on their mortgage payments.
The program was originally
created in response to the rash foreclosures and defaults that happened in the
1930’s in order to provide mortgage lenders with adequate insurance and to help
stimulate the housing market by making loan accessible and affordable. Today, FHA mortgage loans are very popular,
especially with first time homebuyers.
Almost anybody can qualify
for a loan. There is basically no income limits, however, the FHA has set guidelines for applicants.
FHA for instance, sets debt ratio limits to borrowers to ensure they do not
overstretch their financial commitments.
The FHA guidelines, for example, set the maximum debt ration to qualify
for a loan at 41%. An FHA home purchase loan is the easiest
type of mortgage loan to qualify for because it requires a low down payment of
3.5% as against conventional mortgage loan which requires a down payment
equivalent to 5% of the selling price.
Generally, a property
financed with an FHA mortgage loan must
be the borrower’s primary residence and must be occupied by the owner. This
loan program cannot be used for investment or rental properties. However,
detached and semi-detached houses, townhouses, row houses and condominiums within
the FHA-approved condo projects are eligible for FHA financing.
For first time homebuyers, depending on the kind of loan applied, the
terms agreed upon with the FHA-approved lender, and the amount required to be
paid each month over the lifetime of the loan will determine how long the
mortgage will be and what kind of options are available for shorter or longer
loans. In terms of basic options, FHA mortgages are either 15-year or 30-year
loans. The longest time legally mandated for a borrower to pay-off the original
home loan is 30 years. Notwithstanding, for those who availed of the FHA streamline refinance option, the
amount of time paying the mortgage may vary but the original loan will be 15 or
30 years.
In order to qualify for an FHA streamline refinance option, the
original home loan must be an FHA loan with good standing and the refinance
must lower the monthly interest. This refinancing option is nonetheless
available only to homeowners who are using their home currently as their
principal residence. Conventional loan applied to be refinanced by FHA will
undergo the standard employment verifications, credit check, debt ratio
requirement and other considerations.
