FHA Loan Introduction and Explanation

by Darwin on June 12, 2009

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The FHA (Federal Housing Administration) was formed by congress in 1934, to help a needy country rise out of the depths of depression. The majority of the country did not own their own homes, but rather rented. Congress hoped that by establishing the FHA it could turn this trend around.

The FHA does not lend money to home buyers; it insures the loan for the lender. This means that should the home owner default on their mortgage loan, the FHA will cover the cost to the lender. This insurance lowers the risk of loss and allows the lender to grant mortgage loans to those who might not otherwise qualify. In order to reach its goal of creating a nation of home owners, the FHA makes certain demands of the lenders, in exchange for the insurance provided.

In order to be eligible for an FHA loan, the borrower must have a social security number, be a lawful US resident and be old enough to sign on a mortgage loan. Once these simple requirements have been met, anyone (not simply first time home buyers) may apply for a new mortgage loan or refinance that is FHA insured.

The FHA requires that lenders look at credit history rather than credit score. Thus an applicant with a less than desirable credit score, but a good payment history, may in fact qualify for a new mortgage loan. It is still important for a home buyer to be aware of what is on their credit report and be prepared to offer a reasonable explanation of anything that may be considered negative.

FHA loans generally have lower income requirements and require only a 3.5% down payment. The down payment can come from virtually any source including gifts from family. This is an advantage over conventional mortgages, as often it is saving for a down payment that keeps young families from buying a home.

The FHA offers several types of insured loan plans. If you are considering purchasing a home speak to a lender about the possibility of an FHA loan.

Brandon Laughridge is a mortgage blogger for Mortgage Loan Place. MLP focuses on educating consumers on FHA mortgages and other government loan programs.

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June 12, 2009 at 6:32 pm
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