Home Debt Relief Personal Loans Refinance Home Equity Loans Loan Modifications Credit Repair Insurance Bankruptcy and  Foreclsoure

FHA Loans

Digg  Add to del.icio.us  Facebook  StumbleUpon  Technorati   Reddit   MySpace

During the recent economic crisis, credit markets dried up and mortgages became difficult to obtain, especially for people with poor credit. Yet millions of Americans still want to achieve the dream of owning their own home. For homebuyers with a low credit rating, it can be difficult to figure out the best option; no one wants to get ripped off by a mortgage or loan scam. Fortunately, the federal government offers programs to obtain FHA loans that can help people with shaky credit to purchase a home or condominium.

What are FHA Loans?

Here is a brief overview of the FHA. In 1934, during the Great Depression, the U.S. Congress created the Federal Housing Administration (FHA). The purpose was to stimulate home construction, reduce unemployment, and offer loan insurance programs designed to provide affordable housing for people who would otherwise be unable to purchase a home. In 1965 the FHA was incorporated into the Department of Housing and Urban Development's (HUD) Office of Housing. Today, the FHA assists homebuyers by providing mortgage insurance on loans made by lenders throughout the United States and its territories.

The FHA does not make loans. It does not build, buy, or sell houses. If you are buying a house or condominium, you do not apply directly to the FHA for a loan. You apply through an FHA approved mortgage lender such as a bank.

What does the FHA do? The FHA helps homebuyers who meet FHA loan guidelines by insuring their mortgages against default. FHA mortgage insurance provides the lender with protection against losses, and the lender bears less risk because, if the homeowner defaults, FHA will pay a claim to the lender. This insurance, by reducing the lender's risk exposure, means lenders can approve mortgages for people who may otherwise have trouble getting a mortgage.

For the homebuyer with bad credit, the basic steps are these:

  1. Locate and apply to a FHA approved lender such as a bank or mortgage company.
  2. The lender may ask that you apply for FHA mortgage insurance. Or, you may request that you be considered for FHA mortgage insurance.
  3. To qualify for insurance, loans must meet established FHA loan guidelines.
  4. The FHA investigates your finances and, if the risk is deemed favorable, insures the lending institution against loss of principal in case you fail to pay your mortgage.
  5. If you meet FHA loan guidelines and are approved, you pay an insurance premium (generally one half of one percent) on the balance owed.

What makes FHA Loans Attractive?

With FHA mortgage insurance, the borrower receives several benefits:

  • A home appraisal by an FHA inspector
  • A lower interest rate on the mortgage than the lender might have offered without FHA mortgage protection.
  • The borrower is eligible for up to 96.5% financing, which means that down payments can be as low as 3.5% of the purchase price.
  • The borrower is able to fold the mortgage insurance premium into the mortgage.
  • FHA rules put limits on many of the fees that lenders charge in making a mortgage.

FHA Programs

There are a variety of FHA programs, the four below are the most commonly utilized FHA programs that can assist buyers who have poor credit.

  • Mortgage Insurance for One-to-Four Family Homes (Section 203(b)). This program provides mortgage insurance to protect lenders against the risk of default on mortgages to qualified buyers. This program may be used to finance the purchase of new or existing one-to-four family housing, as well as to refinance a mortgage.
  • Single-Family Rehabilitation Mortgage Insurance (Section 203(k)). This program allows the borrower to get just one mortgage loan, at either a long-term fixed or adjustable rate, to finance both the purchase and the rehabilitation of the property.
  • Single-Family Mortgage Insurance for Condominium Units (Section 234(c)). This program insures a loan to purchase a unit in a condominium building.
  • Insurance for Adjustable Rate Mortgages (Section 251). This program insures home purchase or refinancing loans that have adjustable interest rates.

If you have poor credit and meet the FHA loan guidelines, you may benefit from an FHA loan. It's worth investigating.