FHA Home Loans Emerge As A Cheap Alternative For Low-Credit Score Homeowners
FHA stands for Federal Housing Administration, a by-product of the National Housing Act of 1934 and now a sub-group within the U.S. Department of Housing and Urban Development (HUD).
Actually, the FHA does not lend money, nor does it build houses. This administration is in existence to help lenders mitigate their losses should the property owner default.
Therefore, even though it is an inappropriate label, FHA backing is referred to as an FHA loan. For correctly referring to the function of the FHA, the term “FHA-insured” should be used.
Because of the FHA guarantee to back loans, more lenders might grant loans that they would not consider without such backing. With this backing, lenders could feel more secure about granting the loan. Borrower rates may stay lower in such situations.
If a borrower has less than 20% for down payment, he may attempt an FHA loan. Then, mortgage insurance payments will likely be required. Such payments (if the FHA loan is greater than 80%), are 1.5% against the loan and paid at closing. There will also be required is an insurance payment of 0.50% annually and paid monthly.
Homeowners with 15-year fixed FHA loans, however, are exempt from the annual insurance payments.For all homeowners, though, when the loan balance reaches 78 percent of the home’s value, the annual MI is no longer required.
Mortgage rates for FHA loans are typically higher than comparable conforming mortgages but because of new, risk-based pricing from Fannie Mae and Freddie Mac, homeowners with credit scores under 680 are finding FHA a viable alternative. And often with lower rates.
Source FHA Loan Wikipedia, April1, 2008 http://en.wikipedia.org/wiki/FHA_loan