An Introduction to FHA Loans

FHA loans are very popular with those who are attempting to buy their first home and those who may have a bad credit history. Many are familiar with the term FHA loan but do not know exactly what it is. An FHA loan is not a loan in the traditional sense; it is actually a type of insurance available to lenders on loans for those who may not usually qualify for a home loan purchase a home.

A Short FHA History

FHA stands for Federal Housing Administration. Ever since it was created by the US Congress in 1934, the Federal Housing Administration has been offering different types of insurance to lenders. It has since become the largest mortgage insurer in the country with over 60 million properties insured in the United States. The FHA was later became a program under the direction of the Department of Housing and Urban Development. The FHA is also the only government agency that is self-funded, using proceeds from the mortgage insurance paid by homeowners to generate its income.

FHA Mortgage Insurance

The FHA ensures that its approved lenders are protected in case their borrowers are unable to pay back their loans. This greatly minimizes the risk for lenders that give out home loans. Because the risk for the lender is lower, lenders are more inclined to offer borrowers a down payment that is lower than the typical down payment of 20% on a home. This means that younger home owners who may not have as much cash on hand are able to purchase a home when they may not have been able to otherwise. It also helps those with a poor credit history to have the ability to procure a home loan and even rebuild their credit in the process.

The insurance does come at a cost for the home buyers causing higher insurance premiums that can last for the duration of the loan. The lower down payment also means that the monthly payment on the home may be higher because they owe more. It also causes the interest rate to be higher than that of a more conventional home loan. It is also important to note that any property that is bought with an FHA loan must be through an FHA approved lender at an FHA approved property that is appraised by the Federal Housing Administration appraiser.

FHA home loans are not for everyone of course. An FHA loan can be a great option for those who are unable to obtain a home loan because of their current financial situation or for someone with very little cash on hand. Anyone entering the home buying market for the first time could benefit greatly by seeing what is offered to them through an FHA approved loan.

Last Updated: December 21, 2015