The Federal Housing Administration (FHA)

There are many advertisements for FHA Loans available to borrowers which are government insured such as the Streamline FHA Refinance Loan. This article provides information on what the FHA is and how they work to provide an insight on why FHA loans have requirements that conventional loans do not.

First, what is the FHA? Essentially it is a government agency that provides mortgage insurance on loans made by FHA approved lenders. FHA insures mortgages on single family and multifamily homes including manufactured homes and hospitals.

So what is FHA Mortgage Insurance (MI)? FHA loans require little cash investment by the borrower as compared to conventional loans which require larger down payments and stricter qualification guidelines. Thus there is more risk associated with an FHA loan as compared to a conventional loan. As a result, the borrower has to pay mortgage insurance in addition to the regular monthly payment of principal, interest, taxes and homeowners insurance. There is a required upfront mortgage insurance payment of 1.75% of loan amount that can be added to the loan balance and an annual mortgage insurance payment which is dependent on the amount of down payment.

New guidelines require the mortgage insurance to be paid for 11 years or the Loan Term depending on the amount of down payment.

How is the FHA funded? FHA is the only government agency that operates entirely from its self-generated income and costs the taxpayers nothing. The proceeds from the mortgage insurance paid by the homeowners are captured in an account that is used to operate the program entirely. FHA provides a huge economic stimulation to the country in the form of home and community development, which trickles down to local communities in the form of jobs, building suppliers, tax bases, schools, and other forms of revenue.

So even though FHA loans offer more flexible qualification guidelines as compared to conventional loans there is “cost” associated. It is therefore important to work with a broker who will guide to a loan that is right for you based on your financial situation.

For more information, contact out knowledgeable brokers at Loan People USA.


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