Why do people make such a big deal about being able to qualify for an FHA Loan?
Actually, that is a great question, because the loan backed by the US Federal Housing Administration (also known as the FHA Loan) allows a lot of people to afford to buy a home that otherwise could not.
What is an FHA Loan?
An FHA Loan is not actually a loan at all. It is insurance...on a home loan.
Well...THAT was not very helpful! We need a LOAN--not insurance.
Can we try explaining that again?
Yeah, you're right. Let's try explaining FHA Loans a little better than that.
Owning a home is nice, but it's so scary (to some people).
The US Government recognizes that the economy is stronger with a middle class, and one key part of becoming and sustaining middle class status and finances is HOME OWNERSHIP. The US Government wants people to own homes. Amongst other reasons, most people (including the government) believe that higher home ownership rates help stabilize the economy.
What is the scariest thing about buying a home for most people?
There might be a few answers...
The first home is usually the most difficult for a person to get, because owning a home requires a different mindset compared with renting. There are different bills to pay, like home owners insurance, property taxes, and maintenance costs. Of course, for anyone taking out a loan, there also is a little thing called a mortgage (requiring those monthly mortgage payments).
However, none of those is the BIGGEST concern for most home buyers.
What is it then?
THE DOWN PAYMENT!
Even more intimidating for people buying a home is saving enough money to make a down payment on the house.
The US Federal Housing Administration (FHA) provides insurance on loans that lenders make. (NOTE: The lender must be FHA-approved.) The FHA is not actually a lender. It provides insurance on the loans that are made to cover some of the cost in case the borrower defaults on the loan (fails to repay the loan).
To get a Conventional Loan on a home, a person usually needs to be prepared to make a down payment of, at least, 20% of the sale price of the house.
Sale Price of Home: $60,000
Down Payment Required = 20% of $60,000 = $12,000
For most people, that's a lot of money. (It's even higher if you want to buy a home with a larger price tag in a pricier neighborhood.) Therefore, let's take a look at...
To get an FHA Loan on a home, a person usually needs to be prepared to make a down payment of, at least, 3.5% of the sale price of the home (compared with 20% on a Conventional Loan).
Let's put some real numbers on that to compare so that the impact of this difference is understood clearly.
Sale Price of Home: $60,000
Down Payment Required = 3.5% of $60,000 = $2,100
Let's compare the down payments required...
Conventional Loan = $12,000
FHA Loan = $2,100
Which is easier to save enough money so that you can make that down payment?
Of course, it's the $2,100 from the FHA Loan...In this example, it's easier for almost $10K.
When you get this type of loan, it is actually "backed" by the US Federal Housing Administration. The FHA guarantees that the lender will be repaid a portion of loan, even if the borrower fails to pay for that loan.
Because of that, FHA often has certain standards, and just like nearly everything else with the government, it is not a simple...nor quick...process.
However, FHA Loans provide something very important. They provide many buyers a way to purchase a home by lowering the required down payment amount to a level where more people can buy.
That's great for the buyer. The government backing is great for the lender.
As long as most people repay their loans, that's great for the economy...which is great for the government...and us, too!