FHA Loans

An FHA Loan is a mortgage loan insured by the Federal Housing Administration (FHA). The FHA does not provide the loan; rather, it insures the loan for the lender. If the borrower defaults, the lender can seek recourse from the FHA. This lowers the lender’s risk and makes them more likely to issue a loan.

The FHA was formed in 1934, and joined the Department of Housing and Urban Development in 1965. The organization has insured more than 33 million home mortgages since its inception. Today it continues to help families who may have credit issues or need low down payments move into their dream homes, by making it easier to obtain mortgages. FHA mortgages can be either fixed rate or adjustable, but one of the most popular products is the FHA 203(k) rehab loan.

The popularity of FHA mortgages has grown since the collapse of the sub-prime mortgage industry.

According to the director of the FHA, from 1997-2003, Fannie Mae’s and Freddie Mac’s market share of mortgage originations gradually grew to almost 55 percent. From 2004-2006, the private mortgage market dominated, and Fannie’s and Freddie’s business sank dramatically, with their market share dropping below 35 percent. Then as the private market started to freeze up in 2007, Fannie’s and Freddie’s market share took off — up to 73 percent in 2008, but it was a larger share of a much smaller market. The market share of mortgages insured by FHA/VA (Federal Housing Administration/Veterans Administration) has risen much more dramatically, from 3 percent in 2006 to 20 percent for 2008, but even more startling, to 35 percent in the fourth quarter of 2008.

One of the benefits of an FHA-insured loan is low mortgage rates. For single-family homes, down payments can be as low as 3.5 percent, whereas conventional loans today will require at least 5 percent and perhaps even 10 percent down payments. The FHA can also help home buyers finance their closing costs and pre-paid items, by allowing seller concessions up to 6 percent of the purchase price. That means if the buyer purchases a home for $200,000, FHA will allow the seller to contribute up to $12,000 to cover closing costs.

Also FHA mortgage limits for 2009 in the Baltimore metro area go up to $560,000 and in the Washington metro area to the maximum of $729,750.

In addition, the FHA does not allow lenders to charge more than 1 percent for origination fees (what lenders charge for putting together loan documentation), and has no prepayment penalties, meaning that if you pay off the loan ahead of schedule, you won’t be penalized. As with other mortgages, the lender may ask you to pay points, which generally equals 1 percent of the total cost of the home.

However, with an FHA loan there is mortgage insurance: upfront mortgage insurance and monthly mortgage insurance that the borrower will pay. The upfront mortgage insurance is equal of 1.75 percent of the loan amount and is added to the over amount that the borrower is borrowers. Then each month the borrower will also pay a monthly insurance premium.

As is customary with most loans, you’ll need to qualify for an FHA loan by meeting specific requirements, including:

• A good credit record;
• Enough money for a down payment, which can be as low as 3.5 percent. The borrower must have at least that much of their own money into the transactions, but that money can be given as a gift from a parent or relative or someone close to the borrower.
• Total housing costs that are no more than 29 percent of your gross monthly income. Therefore, if your annual household income is $60,000, your housing costs, including principal, interest, property tax, and insurance, should not exceed $17,400, or $1,450 per month.

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