Understanding what a FHA loan is will help you understand the mortgage lending process easier, if you choose to use the FHA mortgage program. What is the FHA program? Well, the FHA program is under the auspices of the Department of Housing and Urban Development (HUD), which was established in 1965. The primary purpose of the Department of Housing and Urban Development is to administer the federal home loan insurance program through approved mortgage lenders. The FHA program helps first time homebuyers who are unable to obtain a mortgage loan through conventional methods. With the FHA program, the lender incurs no risk because the FHA assumes the risk of the loan. So, most lenders welcome FHA borrowers.
FHA loan comes with many advantages. However, the main benefit is it eliminates the strict credit stipulation place on a first time home borrowers, which is common in conventional loans that go through Fannie Mae (FNMA) or through Freddie Mac (FHLMC. Usually someone with no credit history finds it easier to obtain credit through the FHA program. Additionally, the program offers some home assumable loans. Thus, allowing you the option of taking over the mortgage of someone without the extra cost that you may incur with a traditional loan. Closing cost or non-allowable cost is a major concern when you purchase a home, but with this type of loan program the seller or the lender pays part of the closing cost. Your closing cost can be placed into your loan.
Another cost when you obtain a mortgage loan is mortgage insurance premium, choosing an FHA loan affords you with lower cost coverage versus what you would find in a conventional loan when you place a minimal down payment of 3%.
A major stipulation that sometimes impedes a borrower from obtaining a conventional loan is low income. The FHA loan debt ratio income is 29 to 41 percent compare to a traditional lender that has a set debt ratio between 28 to 36 percent.
When most people think of home refinancing they often do not look at FHA loans because they think it is only available for new loans. However, this is in accurate because the program offers also refinancing program, and the refinancing program is eligible to current FHA loan customers as well as non FHA customers whether it is your first or fourth home it really does not matter.
Although there are many advantages for obtaining an FHA loan, there are some drawbacks. One major disadvantage is the loan limitation place on borrowers. The limitations are place based on your geographic area as well as other factors.
Some in the mortgage industry view the upfront mortgage insurance premium as a disadvantage for the borrower as well. However, the mortgage insurance premium (MIP) is so low that its impact on the borrower monthly mortgage payment is minimal and most borrowers do not encounter any financial difficulty due to the additional cost.
Anyone needing information on the FHA program will not have any difficulty because the program is available Nationwide. Now you have the answer of “what is FHA loan ?”