FHA Mortgages

An FHA mortgage is one of the most popular ways to purchase a home. And if you’re looking to purchase a home, it’s important to understand what FHA mortgages are so you can evaluate your options.

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.

  • The most rigid string or limitation to an FHA loan is the fact that there are limits to how much you can borrow. These limits are not based on your income but rather they’re stipulated based on the home prices in your area.
  • Additionally, many people are unwilling to pay the MIP and would rather utilize a different lender to save a bit of money. That being said, there are many benefits to an FHA loan. FHA loans are fairly easy to obtain. They’re based on a debt-to-income ratio, meaning how much money you owe compared to how much money you make. You also don’t need a stellar credit score to qualify; an average or good score is just fine.

    • 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.

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