Have you recently been searching for financing on a new home but finding it difficult to find anything with reasonable terms? Now that sub-prime mortgages are effectively gone, more people are turning to FHA loans to get financing for a new home. FHA loans are federal assistance loans, backed by the FHA (Federal Housing Administration). The FHA insures the lender against loss, and as a result of that protection, allows many borrowers who would not normally be able to acquire financing to do so at a reasonable cost.
Created as part of the National Housing Act of 1934, when defaults and foreclosures were on the rise, the FHA was designed to facilitate various loan insurance programs, as well as increase home production, and provide jobs. The Federal Housing Administration does not make loans directly, nor build houses, but is in place to oversee projects involving those things on a broader level, as well as providing insurance to lenders.
As a result of the wider availability of PMI (Private Mortgage Insurance) these day, FHA backed loans aren't utilized quite as often as they were in their early days, and are typically focused on assisting lower-income Americans, who might otherwise have difficulty acquiring PMI or providing a sufficient down payment for a conventional loan.
Typically, when applying for a loan, the lender will ask whether or not you'd like to apply for FHA loan insurance, and if so will guide you through the application process. The FHA then evaluates the borrower, based on several factors including debt-to-income ratio, as well as credit history. If the risk is deemed acceptable, they will subsequently insure the lender in case the borrower fails to meet the terms of the loan. The borrower typically pays a premium for the insurance, of one-half of one percent.
There are several ways this situation benefits you. The first thing is that you'll receive expert appraisal by an official FHA employed appraiser, ensuring accurate valuation. Also, because the lender has the extra peace of mind provided by federal insurance, they are typically willing to allow you to borrow at a much lower rate than had the FHA not agreed to provide insurance for your loan.
The FHA also administers various programs with special features, such as the ability to insure adjustable rate mortgages (ARMs). What sets adjustable rate mortgages apart from regular home mortgage loans, is that the rate is adjusted every year allowing borrowers to refinance or purchase your home at potentially a lower rate than the initial loan rate. The FHA was approved to back hybrid adjustable rate loans, in which the rate stays the same for the first three or five years, then adjusts anually.
As I mentioned, the FHA doesn't directly make loans. This means that different lenders offer widely different terms, as well as different rates. Some are very competitive. Some aren't. It's important for you to shop around. Call around and ask lenders if they originate FHA loans. It might take some time, but doing a little homework will make a world of difference to your financial future.
