What is an FHA Loan?
The Federal Housing Administration, commonly referred to as “FHA” provides mortgage insurance on mortgage loans made by FHA-approved lenders. The FHA usually insures mortgages on single and multi-family homes. It is the largest insurer of mortgages in the world. Since its inception in 1934, the FHA has insured over 38 million properties.
What is FHA Insurance?
FHA insurance is mortgage insurance that provides lenders with protection in the event of the homeowner’s default. The FHA allows the lender to bear less of a risk when approving a mortgage loan for a buyer since the FHA will pay a claim to the lender if the homeowner defaults. However, there are certain requirements a loan must meet in order to qualify for the FHA insurance. Buyers who are approved for an FHA loan will pay a Mortgage Insurance Premium, or “MIP”, in lump sum at closing and annually (split over the year). This MIP will be determined using the cost of the home, the LTV, and the percentage that correlates with same, which ranged from .80% to 1.05%.
Why is an FHA Loan Beneficial to Buyers?
An FHA loan may be beneficial to buyers who have less-than-perfect credit and who have less money to put down. Buyers can potentially qualify for a loan with a lower credit score than required by conventional loans. However, the approval will likely still be subject to bank standards. The loan-to-value, or LTV, can be higher so that means that a borrower would be able to potentially own a home with putting less money down. The FHA allows for borrowers to put down as little as 3.5% and receive maximum financing.
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