FHA loans

FHA is the Federal Housing Administration. FHA is a government owned corporation established under the National Housing Act of 1934. The mission for FHA was to improve housing standards and conditions. It was also to help America become a nation of homeowners vs. a nation of renters.

A common misconception is that FHA loans are for low income borrowers. FHA housing loans are for borrowers who do not meet the necessary down payment requirements or conditions of conventional mortgages. The lender can offer more liberal terms and competitive interest rates because the loans are insured by HUD (Housing Urban Development). The lenders bear less risk because FHA will pay a claim to the lender in the event the homeowner would default on payments.

Borrowers with a satisfactory credit record, the cash needed to close, and steady verified income to support the mortgage payments without difficulty can qualify for an FHA loan.

Advantages of FHA Loans
  1. Low down payment requirement
  2. The entire down payment can be gifted or borrowed from a relative.
  3. There are no reserve requirements for closing. Most conventional loans require the borrower have two months PITI in the bank as reserves. That is two months of PRINCIPAL, INTEREST, TAXES and INSURANCE payments. The reserves must be seasoned in the bank for 60 days.
  4. A seller or third party is allowed to participate in paying the buyer's closing costs.
  5. Underwriting guidelines can be less restrictive.
  6. A second mortgage can close simultaneously with a new FHA first mortgage.
  7. The lender is insured for the life of the FHA loan.
  8. FHA loans do not carry prepayment penalties.
Disadvantages of FHA Loans
  1. Buyers and sellers may object to paying discount points or other closing costs attributed to FHA financing.
  2. The seller may not be willing to negotiate the purchase price for an FHA purchase because the seller may be required to pay heavy costs to assist a buyer with the purchase.
  3. A one percent origination fee is charged on FHA loans.
  4. Loan processing of FHA loans can take longer than conventional loans.
  5. Appraisal guidelines are stricter on FHA loans.
  6. Borrowers are generally only allowed one FHA loan at a time.