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How FHA Loans Work
By
Dave Dinkel
The Federal
Housing Administration (FHA) does not
directly make loans to borrowers but rather
provides insurance on loans made by approved
lenders. FHA-insured mortgages can be
obtained for single-family, multi-family,
manufactured and mobile homes, and
hospitals.
The FHA was created in 1934 by congress to
help Americans to obtain a mortgage and
purchase a home. Until the FHA came into
being around 60% of Americans rented their
homes, and most mortgages had high monthly
payments, short loan terms, and stringent
approval requirements. In 1965, it became
part of the U.S. Department of Housing &
Urban Development (HUD).
FHA loans differ from conventional loans in
a number of ways. The down payment required
for a conventional loan is typically much
higher than for an FHA-insured loan. FHA
loans also have lower credit requirements
than conventional loans, making them more
available to a wider range of potential
homebuyers.
FHA mortgage insurance appeals to lenders
because it protects them against loss should
the borrower default on the loan. That is
the key difference between FHA mortgages and
conventional mortgages - that lenders still
get paid no matter what. Because FHA
mortgages are more preferable to lenders
than conventional loans, it's far easier for
a borrower to get approved for one. It is
therefore quite often to a potential
homebuyer's advantage to pursue FHA-insured
mortgages.
FHA loans offer borrowers several other
valuable benefits, not least of which is
those aforementioned smaller down payments.
Unlike a conventional loan, which ordinarily
requires 10-20% down, FHA-insured loans only
require down payments as low as 3-5%. The
FHA is also more flexible in calculating
factors to determine whether or not to
approve the loan, factors such as household
income and repayment ratios.
The borrower is the one who pays for the
mortgage insurance, usually by having it
folded into their monthly mortgage payment.
The cost of FHA mortgage insurance typically
drops off when the balance remaining on the
loan is greater than three-quarters of the
property value or after 5 years, which takes
longer.
Having insured over 30-million properties
since its formation in 1934, the FHA is the
world's single largest mortgage insurer. It
is funded completely by way of
self-generated income, via the mortgage
insurance payments made by its mortgagees
(or borrowers). Currently, the FHA has
nearly 5-million single-family homes and
nearly 15,000 multi-family homes in its
insured-mortgage portfolio.
The FHA is considered a boon to the housing
market and the nation's overall economy, as
it promotes house building, jobs, schools,
tax bases, and community development.
Conclusion
Are you one
of the many that suffer from insurmountable
debt and wonder if bankruptcy is an option?
Give us a call at (203) 924-6700 or
contact us.
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