This a question I often get from borrowers as most people have heard about FHA Loans but don't truly understand what the difference is between a Conventional Loan versus an FHA Loan. Well, here is your answer. Let's start with a brief history:
FHA Loans - A History
The Federal Housing Administration, generally known as "FHA", was established in 1934 to improve the construction and financing of housing. A part of the United States Department of Housting and Urban Development (HUD), FHA provides mortgage insurance on single-family, multifamily, and manufactured housing homes throughout the United States and its territories. When the FHA was created, the housing industry was on its back:
- Two million constructoin workers had lost their jobs
- Terms were difficult to meet for homebuyers seeking mortgages.
- Mortgage loan terms were limited to 50% of the property's market value, with a repayment schedule spread over 3 to 5 years ending with a balloon payment.
- America was primarily a nation of renters. Only 4 in 10 households owned homes.
- During the 1940's, FHA programs helped finance military housing and homes for returning veterans and their familes after the war.
Since its creation, FHA has had a major influence on real estate financing. Many of the mortgage loan programs, which are taken for granted today, were initiated by FHA. For example, before FHA, it was common practice to make real estate loans for short periods of time. Loans then were not fully amortized and every few years borrowers had to renegotiate loans with their lenders. Depresssion era lenders were not willing or able to renew loans and as a result, massive foreclosures occurred. Major loan reforms spearheaded by FHA included:
- Fully Amortized loans
- Low Down Payment loans
- Low Interest Rates
- Mandatory collection of taxes and fire insurance premiums in an Escrow Account
- Standards for qualifying the borrowers
The FHA is NOT a lender. The FHA insures the loans.
FHA mortgage insurance provides lenders with protection against losses as the result of homeowners defaulting on their mortgage loans. The lenders bear less risk because FHA will pay a claim to the lender in the event of a homeowner's default. Loans must meet certain requirements established by FHA to qualify for insurance. The cost of the mortgage insurance is passed along to the homeowner and typically is included in the monthly payment. In most cases, the insurance cost to the borrower will drop off after five years or when the remaining balance on the loan is 78 percent of the value of the property - whichever is longer.
SUMMARY
FHA loans were introduced in 1934 to make homes more affordable for First Time Homebuyers by offering lower interest rates, lower FICO credit scores, longer amortization periods, and lower down payment requirements. The mortgage market has evolved much within the last 80 years; however, FHA loans today are still a good choice for First Time Homebuyers needing to get into a home for small down payment (little as 3.50%). Up to 95% LTV, Conventional loans can be had to today but only down to a 5.00% down payment with mortgage insurance (FICO scores down to 680). Not every Lender can offer FHA loans as they must be registered and approved as a designated FHA lender.
For more information on FHA loans please visit: http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/hsgsingle
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If your looking for a Purchase or Refinance FHA mortgage loan in the State of Texas feel free to contact Scott R. Butcher, Mortgage Banker (#313531) with Maker Capital Group, LLC located in Austin, TX. Mr. Butcher is a leading mortgage banker in the industry and can be reached directly at 512-796-7738 or scott@makercapitalaustin.com. You can also visit his website to pre-qualify for your FHA loan at http://sbutcher.ameriprofunding.com.
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