Federal housing administration loans refer to mortgages that are backed by the Federal Housing Administration (FHA). The loans are issued by FHA-approved lenders. Thus, the FHA doesn’t issue the mortgages themselves; instead, they insure them. In addition, in the case a homeowner defaults, the approved lender would receive a claim from the federal agency.
Federal housing administration loans allow low to medium-income households to obtain mortgages; the FHA requires a lower minimum down payment for mortgages and allowing individuals with lower credit scores to obtain loans. Additionally, federal housing administration loans require a down payment of as low as 3.5% of the purchase price for first-time homebuyers with a credit score of 580.
First-time homebuyers with a credit score of less than 580 but above 500 can apply for a mortgage with a minimum down payment of 10% of the purchase price; however, the benefits come with restrictions and requirements. In addition, lenders can give such deals to homebuyers since the loans are backed by the federal agency.
What is the Federal Housing Administration (FHA)?
The Federal Housing Administration (FHA) is part of the U.S. Department of Housing and Urban Development. The FHA insures mortgages on multifamily or single-family homes, hospitals, and residential care facilities. Insuring more than 46 million mortgages since 1934, its inception date, the U.S. federal agency is one of the world’s biggest insurers of mortgages.
The Federal Housing Administration was created when the U.S. housing industry was going through difficult times following The Great Depression. Then, two million construction workers were unemployed, 50% down payments were required for a mortgage, and repayment schedules were spread out over 3 to 5 years. Also, mortgage periods ended with a balloon payment. About 60% of Americans were renting at that time. For context, the U.S. homeownership ratio in 2020 was 65.8%.
During the economic downturn, the FHA provided access to mortgage credit, which aided in recovering the housing market. Currently, the federal agency insures over eight million single-family home mortgages and oversees a total insurance portfolio of over $1.3 trillion.
Five popular approved lenders that work with the federal housing administration are
For FICO scores of at least 580, a 3.5% down payment of the purchase price is required; for FICO scores within the 500 to 579 range, a 10% down payment of the purchase price is required.
Additionally, a Mortgage Insurance Premium (MIP) is required; MIP is a premium that is paid upfront and added to monthly mortgage payments. Also, a debt-to-income ratio of less than 43% is required. Other requirements include the residence being the borrower’s primary one and for the borrower to supply proof of employment and a steady income.
Other Federal Housing Administration Programs
The Federal Housing Administration also offers Home Equity Conversion Mortgages (HECM) for seniors 62 years of age or older. HECM is a reverse mortgage; it allows homeowners to draw equity out of their house. The amount one can withdraw depends on a variety of factors.
HECM is typically done by seniors with equity in their homes and who want to supplement their income through a reverse mortgage. In addition to HECM, the FHA also offers the Energy Efficient Mortgage program (EEM).
The EEM enables families to finance energy-efficient improvements, consequently saving money on utility costs. By reducing utility costs through the EEM program, borrowers will see more available income to make mortgage payments and not default.
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