FHA Loans

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An FHA loan is a loan used to buy a home, and is insured by the Federal Housing Administration (FHA). An FHA loan can be considered as a form of financial assistance from the federal government, helping low-income individuals with the necessary money to buy a home. In order to acquire an FHA loan, a mortgage insurance premium provided via a bank is required. This premium is paid to the FHA by the borrower through the bank, and is roughly equal to one-percent of the value of the loan. FHA loans began as a result of the overwhelming amount of housing foreclosures during the 1930′s Depression era, with the original intention being to ensure that the banks were given enough insurance to cover the high rate of foreclosures.

How To Obtain an FHA Loan

To obtain a Federal Housing Administration loan, an individual must first approach a lender (bank, credit union or mortgage broker), and inquire about whether or not the lender is qualified to handle FHA loans. The lender must be qualified to handle FHA loans through the United States Department of Housing and Urban Development. Once the individual has chosen a qualified lender, the lender must then investigate the potential home-owner for any financial risks. By performing such an investigation, the potential home owner will be able to know—through an analysis of the individual’s income and spending needs per month—just what type of home he or she can reasonably expect to afford. If the potential homeowner has no credit (or a minor amount), FHA can instead approve a co-signer on the loan. In such a situation, the co-signer need not be a relative of the potential homeowner, and also the co-signer need not be expected to live in the home that the potential homeowner will be purchasing. Furthermore, regarding credit, most lenders of FHA loans will not approve an applicant who has a FICO score below 640. However, if a lender does approve an applicant with such a low score, increased interest rates can be expected.

FHA housing mortgage loan application with keys on a house shaped key chain

Down Payment Grants

A down payment grant is monies offered to lower-income people who are trying to buy a home. There are various kinds of grants, such as the Grant America Program and the federally-funded American Dream Down Payment Initiative. However, in 2006, certain grant programs were classified by the federal government’s IRS as fraudulent. For example, the program called Partners in Charity is now no longer allowed to be considered as a not-for-profit organization. The government’s reasoning behind the ruling was that such organization’s monetary operations involved a seller of a home to pay a certain amount of money to the organization after the selling of a home was complete. Thus these “charities” were making a profit off of selling homes to first-time buyers.

In 2007, the Department of Housing and Urban Development banned such “charitable” grant programs, stating that as of October 30, 2007, no down payment grant organization that charges a fee to the seller of a home can hand out grants to first-time home buyers. Furthermore, and as a result of the above 2006 government ruling, many grant programs established themselves as government-operated, exempting them from the 2006 ruling.

Private Mortgage Insurance

The purpose of Private Mortgage Insurance, or PMI, is to provide a warranty to home loans that are not provided by the government. In the private sector, PMI’s are akin to an FHA loan. The way a PMI works is the private business places insurance to cover a certain amount of the homeowner’s loan in order to decrease the financial danger to the bank. This certain amount of insurance is paid to the bank in the event that the homeowner forecloses. Also, in contrast to an FHA loan, a PMI business will require a fee to be paid in order for the loan to be insured.

In 2012, the Federal Housing Administration developed an insurance system similar to PMI. For example, any new FHA loan, or any refinanced FHA loan, that was approved on June 2009 or thereafter, will be currently charged an “upfront mortgage insurance premium” (UFMIP) equaling 1.75%, as well as a yearly “mortgage insurance premium” (MIP) as high as 1.25%. However, UFMIP’s and MIP’s for an FHA loan approved before June 2009, are required to pay only 0.01% for a UFMIP, and 0.55% for an MIP.