What is Federal Housing Administration?

It began in 1934. The economy was in shambles, people were penny pinching daily just to survive, and the real estate market was dysfunctional at best, entirely broken at worst. Trying to rebuild the broken economy, the government created multiple programs. One of these was the Federal Housing Administration (FHA). Its purpose was to breathe life back into a barely functioning real estate market by making loans not only possible, but affordable. The hope was that by improving the real estate market, the rest of the economy would feel the effects and follow suit. But what is this administration and how do the loans work?

Homeowner Benefits

In a nutshell, the Federal government created this program, designing it to insure the mortgages that the mortgage lenders have given toward the purchase of a home. The homeowner pays mortgage insurance on the loan, so if for some reason the loan is defaulted on, the borrower doesn’t take a heavy loss. It is a great resource, particularly for people who are unable to qualify for a traditional loan due to poor credit or a less than exemplary financial history.

When this program was created, most people didn’t own a home because the mortgage was so difficult to carry. In 1934 more than 50% of the American population rented their home*. After its creation, it became possible for more people to become homeowners. That 50% began to decrease, dropping dramatically as the years progressed.

FHA Loan vs. a Conventional Loan Business In Your Palm

When you compare traditional loans vs. a Federal loan, you’ll find that they differ in a number of ways. Most notably, the requirements for securing the Federal loan are less stringent than those required by traditional lenders.

The most common pitfall for potential homeowners is the credit score. This is especially true in today’s economy. Banks are a little more wary when considering a loan than they have been in previous years. If the credit score is low, typically the loan is either not approved or the buyer will be given an increased interest rate. This increase can be the nail that closes the coffin on getting that new home. With a Federal loan, things work a little differently because FHA requirements are a different set of rules. Credit score is looked at and considered, but there is no set number necessary before approval of a loan. Instead, each lender chooses how they will work with the score, often taking into account the overall financial situation of the potential homeowner.

A few other differences with an FHA vs. a conventional loan are the down payment and the closing costs. Depending on the lender, a traditional down payment may be anywhere from 5% to 20%. Each lender has different guidelines to determine the actual down payment. Because the Federally insured loan carries a reduced risk for the lender, the down payments are significantly lower, often closer to the 3.5% range, depending on the lender. So if the home being considered has a price tag of $200,000, the down payment for a traditional loan may be anywhere from $10,000 to $40,000. That’s a hefty sum to produce when you’re trying to get into a home. With the non-conventional loan, the down payment would be significantly less than $10,000. In addition, the down payment can come from a number of sources so it may be a lot easier to come up with than it would be on a traditional loan.

Closing costs are another snag people run into when purchasing a house. They are typically a few thousand dollars and are usually required with a traditional loan. Again, because the FHA requirements are different, the closing costs are looked at differently. It is not uncommon for a homeowner to purchase the house without paying any closing costs up front; they are frequently added to the loan instead. If a homeowner does pay the closing costs, they are usually smaller than they would be on a traditional loan.

When you’re looking to purchase a home there are a lot of different options you can and should consider. This non-traditional loan is one of them. If you don’t consider your options, you may walk away without the home and with the belief that you will not be able to qualify for one. Worse, you may get the home but end up paying far more than you should have if you had looked at all your sources. It’s best to go into the house shopping business with a team at your side, one that includes a good agent and a mortgage company you can trust to help you get the best deal possible.