What is an FHA Loan?
An FHA loan is simply a mortgage loan that is guaranteed by the Federal Government, specifically, the Federal Housing Administration(FHA). This government guarantee reduces the financial risk to FHA-approved lenders if the borrower defaults on their mortgage payments.
The FHA loan program was created as part of the National Housing Act of 1934 in response to the banking crisis during the Great Depression. The goal of FHA is to provide stability in the housing market by increasing the availability of funding for home building and purchasing.
Why get an FHA Loan?
Because this loan is guaranteed by the government, it allows lenders to be more flexible with credit and borrower qualifications. At this time, unless you have at least 20% to put down on a new home, FHA is probably going to give you a lower payment and costs.
FHA requires only a 580 score.
Conventional loans generally require a 620 score and have rate increases on a sliding scale for everyone who has less than a 760 score. FHA's interest rates are usually better than Conventional for anyone who doesn't have a high score or lots of money to put down. FHA is NOT just for first time buyers.
FHA allows a low down payment of just 3.5%
The seller can also pay up to 6% of the sales price towards your closing costs resulting in a lot less cash needed to buy a home compared to a typical conventional loan. FHA allows all of the money needed to come from a gift. Conventional loans place a lot of restrictions on gifts and the minimum amount you need to have of your own.
FHA mortgages are also more flexible with debt-to-income ratios and Co-Signors allowing you to potentially be approved for a higher loan amount.
FHA loans have been around for over 80yrs and have always been "Full Doc" common sense mortgages where the borrowers must provide proof of sufficient income and assets in order to be approved.
We have done many FHA, Conventional and VA loans in the past 20 yrs. Other than the 4 yr period from 2003 thru 2007 (where Conventional and SubPrime were the preferred loan program), FHA has been the loan of choice for most of our borrowers.
Of course, everyone's situation and qualifications are different and we will suggest other options if it looks like they would result in a lower monthly payment or costs.