What are FHA loans? A Federal Housing Administration (FHA) mortgage loan is a loan issued by an approved FHA lender. The FHA insures the mortgage and it does not issue the loan. Consumers may use FHA insured loans for single-family, multi-family and manufactured homes. An FHA backed mortgage offers lower interest rates than a conventional mortgage and you may qualify for the loan with a lower credit score. FHA loans originated in 1934, as a way to improve home sales during the Depression. Many lenders offer these loans to first-time home buyers, as they come with low fixed or adjustable interest rates. The lenders loan the money, and the FHA backs the loan as a protection to the lender. To offer these loans, the lender must be licensed through the FHA and follow its specific guidelines.

You may already know that the purpose of FHA loans is to make housing more affordable, especially for first-time homebuyers. The FHA runs several programs to promote home ownership. In most cases, FHA loans are mortgages obtained with the help of the FHA. With a small down payment, buyers can purchase a home. An FHA mortgage loan can work with as little as 3% down and those funds can come from a family member, charity, or your employer. So how do FHA loans work? The FHA promises to pay lenders if a borrower defaults on an FHA loan. To fund this obligation, the FHA charges borrowers a fee. Home buyers who use FHA loans pay an upfront mortgage insurance premium (MIP) of 2.25%. They also pay a modest ongoing fee with each monthly payment. If a borrower defaults on an FHA loan, the FHA uses collected insurance premiums to pay off the mortgage. Instead of the normal 20%, an FHA loan allows for only 3% down payment. This opens the door of home ownership to many who are just starting out and haven’t yet been able to earn enough to save up twenty percent of the price of a home in today’s market. Most mortgages require minimum credit scores. There are only two requirements relating to credit for FHA loans. Firstly, if you had previously suffered through a foreclosure, then you must wait three years until after the foreclosure was finalized in order to be eligible for an FHA loan. Secondly, the borrower may not have a bankruptcy filed for the previous two years. If so, the borrower must wait until two full years has elapsed since the filing.

An FHA mortgage rate is usually similar to other fixed rate loans. FHA loans are available at either a fixed rate
or at an adjustable rate. They provide an excellent opportunity for those just starting out to be able to buy a home. The FHA mortgage rate is linked to the mortgage rates of the U.S. Treasury (the prime mortgage rate) at the time that the mortgage is being applied for. The mortgage rate will be calculated depending on how credit-worthy the borrower is, their income and their Loan to Value Ratio (LTV). The LTV calculates how much of a financial risk the borrower is determined to be. It is calculated as the mortgage amount to be borrowed divided by the appraised value of the property, which is to be purchased. An LTV of more than 75-80 percent is said to be considered as high risk. Under FHA mortgages, even borrowers with an LTV of 95 percent are eligible, but they will most likely need to pay higher interest rates.

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