For this blog series, we’ll be explaining what the FHA Loan program is, it’s main goals, and how to apply. This is going to be a four part series, as we want to make sure you have all of the information on this specific loan program! Just like with the Conventional Loan program, we’ll break this down into 4 parts.
What is the FHA Loan Program?
The FHA Loan Program is a mortgage insured by the Federal Housing Administration. The FHA insures mortgages on single and multi-family homes for FHA-approved lenders to protect against losses as a result of a homeowner defaulting on a mortgage.
This also protects the borrower as well, as the Federal Housing Administration would be paying for that default. Due to the combination of affordable low down payments and low fixed rates, the FHA Loan Program is typically used most often by first-time home buyers or borrowers who haven’t bought a home in several years.
In order to apply for FHA loans, the minimum credit score to apply is 500. However, if the borrower has a 580 credit score or higher, they qualify for the 3.5 percent down payment option.
Similar to USDA Home Loans, FHA Homes must be safe and sanitary for the home-buyer. This means that there are requirements for water tests, as well as other important inspections that may result in additional tests, like roof inspections or foundation certifications.
One advantage is that FHA Loans have more cost-friendly benefits when making the minimum down payment than other loan programs. The caveat to this is that with a down payment of 3.5% comes the need to pay for private mortgage insurance.
Fortunately, private mortgage insurance premiums can be removed upon reaching 20% equity in the home, or by fulfilling lender-specific down payment requirements. In this case, the borrower will need to pay an upfront mortgage insurance premium.
Why Was the FHA Loan Program Created?
The FHA Loan Program was created originally to create opportunities for moderate income families to purchase their first homes. This program allows borrowers to buy safe and sanitary homes that allow a bit of a lower restriction on down-payment requirements and credit score eligibility.
The Federal Housing Administration wanted to make owning a home a reality for the middle class at an affordable price. When the middle class moves into a home and settles in areas, this increases the economy of that specific region by more than if people rent in the same areas.
Before the housing market bubble burst, there were all kinds of interesting program types for borrowers to take advantage of. For example, there were mortgage loans that covered 100% of the cost of the home if a borrower met the requirements.
Similar to the Conventional Mortgage, FHA Loan programs were apart of this wave. However, those have been removed to protect both banks, the Federal Housing Administration, and borrowers from defaulting on their loans.
For the next part, we’ll be talking more about Eligibility Requirements and borrower categories.