 When it comes time for most people to buy a home, some sort of loan will usually be needed to cover the costs of buying a house as well as the price of the home itself. The median home price in the United States is approximately $215,000, and since the vast majority of Americans don’t have that kind of cash lying around, they borrow money, usually in the form of a mortgage loan. An FHA loan is a mortgage loan that is insured by the U.S. government. Since the government insures the mortgage loan, lenders will be more willing to give out loans with fewer requirements and stipulations. With an FHA loan, the government doesn’t actually give you the mortgage loan, a lender does (lenders can be institutions like banks or mortgage brokers). Any money used to pay for the home will come from the lender, not the U.S. government – the government simply insures that loan so that lenders feel safer about lending to certain people. With government insurance, lenders will give out more loans, since they know that if a borrower can’t pay the loan, the government will step in and cover it.
The “FHA” in “FHA loan” stands for the Federal Housing Administration, a government agency which is itself a part of the Department of Housing and Urban Development (HUD). FHA was created in 1934 as a direct result of the Great Depression, one of America’s worst economic downturns. During the Great Depression, millions of Americans were unable to make payments on their debts, the banking system failed, and millions of homes were foreclosed (a process
in which a lender takes back a house to sell on
an open market).
To combat the growing problem of indebtedness and a lack of homeownership during this period, the United States government set up the FHA, which was designed to provide struggling families with loans so that they could purchase a home. The Great Depression ended in the late 1930s, and since then FHA loans have been used basically for the same purpose: to provide low- and moderate-income families with affordable housing. FHA loans are also great for first-time home buyers and those who have credit problems.
So why should anyone get an FHA loan? If you don’t qualify for or can’t afford a conventional loan (prime or subprime), it is possible that you would qualify for an FHA loan, since FHA loans have:
1
.
No credit score requirements
2. Lower down payment requirements
3. Low closing costs
4. Property condition standards
5. Lower monthly mortgage insurance
6. Special discounts for certain individuals
FHA loans, like any type of loan, do have their disadvantages. The most significant disadvantage of FHA loans concerns the loan limits. In areas of the country where homes are expensive, you might not be able to find an FHA loan that can cover the total cost of the house. In places like New York and southern California the maximum loan limits of FHA loans are in the $300,000s, even though the average home prices for these areas is often above $400,000. This doesn’t mean that families in New York and California shouldn’t try to obtain an FHA loan, it just means that they may have to find other ways to finance the entire cost of the house. Furthermore, the FHA is currently asking congress for permission to increase their loan limits. If this legislature passes, then the FHA will be able to reach millions more families and this disadvantage will no longer be a problem.
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