What is an FHA loan?

In 1965, the Department of Housing and Urban Development (HUD) was formed. Within HUD operates the Federal Housing Administration (FHA), which has the primary responsibility for administering the government home loan insurance program. This program allows buyers who might otherwise not qualify for a home loan to obtain one because the risk is removed from the lender by FHA who insures the loan for the lender.

The most popular FHA home loan program by far is the 203(b). This is your standard fixed rate loan for 1-4 faily owner occupied houses and only requires a minimum of 3% from the borrower. This loan also permits 100% of their money needed to close to be a gift from a relative, non-profit organization, or government agency.

The main advantage to a FHA home loan is that the credit criteria for a borrower are not as strict as Conventional Loans sold to Fannie Mae (FNMA) or Freddie Mac (FHLMC). Someone who may have had a few credit problems or no traditional credit should not have a problem obtaining FHA financing. Also, FHA home loans are assumable, allowing a person to take over the mortgage without the additional cost of obtaining a new loan. In addition, the seller or lender must pay for part of the "traditional" closing costs (called non-allowable costs) while a borrower's allowable costs can partially be wrapped into the loan.

The mortgage insurance premium is cheaper for an FHA loan versus a conventional loan with 3% down. Finally, FHA loans mayrequire less income to qualify as they will exceed he Conventional debt ratios of 28/36% as their standard 29/41%.

The greatest disadvantage of FHA home loans is that FHA limits the loan size that a borrower can borrow. The limit for most counties in North Carolina is around $200k. Others may try and convince you that the FHA upfront mortgage insurance premium (MIP) is a disadvantage. However, this amount makes just a very small increase in the borrowre's monthly payment and is partially refundable.

If you would like to know if your qualify for an FHA refiance or purchase, please give us a call today to discuss your options.