Things You Need to Know About FHA Mortgage Loans

 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.