The FHA stands for Federal Housing Administration and it was developed after the great depression when the banking system was restructured. The purpose was to regulate the mortgage industry, including the terms and interest rates people are charged. In general, they make it easier for people to obtain a home loan.
An FHA loan or mortgage is a loan that’s insured against default by the FHA. This means the FHA guarantees the lender that they will get their money even if you the borrower are unable to pay it back – in other words if you default. This guarantee means lenders are more willing to loan people money to buy homes, thus making it easier to purchase a home.
How does the FHA make this guarantee? They charge lenders a fee – both an upfront fee and a small monthly fee to cover their costs. The fee is called a mortgage insurance premium or MIP.
While an FHA loan may be right for some, it does come with some strings that some people are not interested in.
If you’re looking for a home, it pays to investigate FHA loans in your area. Find out how much of a home you can get in your area. If you’re willing to pay the MIP and you have an average credit rating, and the loan meets your home needs, it can be a great option. This is particularly true for first time home buyers or home buyers who have less than stellar credit.