What Is An FHA Loan?

Most of us will experience the need to borrow some money at least at one time in our life. We borrow money when we want to buy a house or home, when we would like to buy a car, to study at the College or University, when we start our own business - even when we use our credit cards.

There are many types of loans and mortgages, like FHA loans, Student loans, College loans, Personal loans, Payday loans, Business loans, Commercial loans, Auto loans, Car loans, Vehicle loans, Motorcycle loans, Military loans, Construction loans, Home loans, House loans, Home equity loans, Mobile home loans, Bridge loans, Failure loans, Farm running loans, Agriculture loans, Debt consolidation loans, Direct Loans, Government loans, Secured loans, Unsecured loans, Refinance/remortgage loans, Bad credit loans, etc., just to name a few. 

Within each loan term there are other sub terms like Fixed rate vs.  Variable rate, Adjustable rate, ARM, PITI, HELOC, Balloon Mortgage, reverse mortgage, and other bewildering financial terms we will attempt to clarify here. 

What is FHA? 

Home mortgages are a very important part of the loans universe but here we will focus on a specific one called FHA.  The Federal Housing Administration (FHA), an entirely owned government corporation, was established under the National Housing Act of 1934 to improve housing standards and conditions.  Its main goal was to provide an adequate home financing system through insurance of mortgages, in addition to stabilize the mortgage market. 

FHA is not a loan, but instead, it is an Insurance!  If a home buyer defaults, the lender is then paid from the insurance fund.  With an FHA loan, you will be able to you buy a house with as little as 3% down payment, rather than the higher percentages needed to secure a lot of conventional loans.  Benefitting from the FHA loan program is a very good way for first time home buyers, or anybody with little down payment funds, to buy a home.  FHA is not a program reserved only for first time home buyers.  You can also buy a third or fourth home using an FHA loan.  The only requirement of fha loan is that you can only have one FHA loan at a time. 

FHA helps low and moderate income families purchase homes by keeping the initial costs down.  By serving as an umbrella under which lenders have the confidence to extend loans to those who may not meet conventional loan requirements, An FHA mortgage insurance can allow individuals to qualify who might have been formerly denied for a home loan by conventional underwriting guidelines.  It also protects lenders against loan default on mortgages for properties which consist of manufactured homes, single-family and multifamily properties, and some health-associated facilities. 

The two very basic terms you need to know are PITI and Long Term Debt.  PITI stands for Principle, Interest, Taxes, and Insurance.  It is associated with your mortgage and property housing total monthly cost.  Your maximum PITI must not exceed 29% of your gross monthly income. 

Long term debt consists of such things as car loans and credit cards balances.  To qualify for FHA loan your PITI + Long Term Debt must not exceed 41% of gross monthly income. 

This is much lenient terms as compare to conventional loan terms of maximum PITI which are 26% - 28% and have a Total PITI + Long Term Debt of 33% -36%. 

How To Qualify For An FHA Loan 

Qualifying for an FHA loan you need the following: 

- Good credit history which shows you meet your financial obligations. 

- PITI + Long Term Debt not to exceed 41% of the gross monthly income. 

- Enough cash for down payment at time of closing, which is 3% of the total cost. 

- 2% to 3% closing expenses cost of the price of the house.  (Homeowner's Insurance, Attorney's fees, title fees, and title insurance, Private Mortgage Insurance (PMI) if you're paying less than 20% down, the loan origination fee, and a fee that will go into the FHA insurance fund). 

The FHA ARM - Adjustable Rate Mortgages is a HUD -US Department of Housing and Urban Development, mortgage exclusively designed for low and moderate-income families who are trying to make the switch into home ownership.  At the time it is given, the ARM typically has an interest rate with several percentage points lower than a fixed rate mortgage. 

The interest rate can change as market conditions change.  If there is an increase in interest rates, your mortgage payment will also be higher.  If there is a decrease in interest rates, your mortgage payment will be lower, also. 

The reverse mortgage is regularly of interest to senior homeowners.  This loan provides cash for living, health or other expenses.  Payments are made to the borrower in a lump sum or monthly.  A large amount of reverse mortgages are issued to those 62 and older who own a debt free home with no tax liens. 

A Home Equity Line of Credit (HELOC) will allow you to use equity in your home in order to pay for home improvements, debt consolidation or other financial goals.  With an acceptable debt, credit and employment history, you might be able to borrow up to 85% of the appraised equity in your home. 

Balloon Mortgage - the buyer pays interest for a period of three to five years on a balloon mortgage.  Afterward the whole principal comes due all at once.