What’s A FHA Loan?
How about a quick glance back in history to answer this one…
The original low down payment financing mechanism introduced during the Great Depression and made possible by a revolutionary approach of mitigating risk of loss to approved lenders throughout the United States and its’ Territories, by insuring the performance of single family and multifamily home mortgages against loss.
The insurance is issued by the Federal Housing Administration (FHA) and backed by the full faith and credit of our Federal Government. The cost of the insurance is paid by the borrower in the form of a nominal insurance fee that is added to the monthly payment on the mortgage. FHA is the largest insurer of mortgages in the world, insuring tens of millions of mortgages since its inception in 1934.
What Is FHA Mortgage Insurance?
FHA mortgage insurance provides lenders with protection against losses in the event of homeowners defaulting on their mortgage loans. It works kind of like “life insurance on your payments”. If/when your payments on the FHA home loan “die” the FHA insurance policy is cashed-in by your lender. The lenders bear less risk because FHA will pay a claim to the lender in the event of a homeowner’s default and foreclosure.
Why Does FHA Mortgage Insurance Exist?
Unlike conventional home loans made during the Great Depression that adhered to strict down payment and underwriting guidelines, FHA-insured loans were introduced to encourage home ownership (sound familiar?) and structured to require very little cash investment to close a loan. Not unlike today, with our “Great Recession”, economists understood way back then that home ownership could be a strong economic stimulant due to the almost aphrodisiac effect it has on owners. I’ll admit that even I couldn’t resist frequent trips to the local home improvement centers the day I bought each successive home in my life. I find it intoxicatingly pleasurable making my home “MINE”. I’ll spend money on paint, change-out lighting fixtures, flooring and decorating accents to suit my esthetic senses. INFACT, I’ve allowed myself to get “lost in the pleasure” of the whole experience time and time again! I’m hooked, and I don’t even want a cure for this addiction. It’s become a passionate hobby of mine, along with landscaping and classic cars.
But enough about the fun, FHA mortgage insurance is a bargain when you consider the early opportunity to multiply wealth (leveraged equity) for young buyers who are allowed to join the “home ownership club” without enduring the extended amount of time it takes to save-up a 20% or more for a down payment. There is also more flexibility in calculating household income and payment ratios with FHA. The cost of the mortgage insurance is passed along to the homeowner and is included in the monthly
The History of FHA
Congress created the FHA in 1934. The FHA became a part of the Department of Housing and Urban Development’s (HUD) Office of Housing. When the FHA was created, the housing industry was flat on its back as the Great Depression took hold of the economy:
- Two million construction workers had lost their jobs,
- Terms were difficult to meet for homebuyers seeking mortgages,
- Mortgage loan terms were limited to 50% of the property’s market value (LTV), with a repayment schedule spread over three-to-five years, ending with a balloon payment,
- America was primarily a nation of renters
- Only one-in-four households owned their homes.
Sound like Déjà Vu?
The FHA moved in to stabilize falling home prices and made it possible for potential home buyers to get the financing they needed when recession prompted private mortgage insurers to pull out of oil producing states in the 1980s.
In the more than 70 years since the FHA was created, much has changed, and Americans are now arguably the best housed people in the world. HUD has helped greatly with that success.
The allure of FHA is that it provides financing by approving borrowers with lower down payments, lower credit scores and employs more liberal underwriting. Rather than discuss all of the FHA loan programs, which change from time to time, you will likely select their main program called the 203(b).
Mortgage refinancing with a FHA loan is easy and advantageous for most homeowners. Some advantages of using an FHA mortgage for your mortgage refinance are as follows:
- Cash-Out up to 85% of your Property’s Value,
- Consolidate First and Second Mortgages into a Single Loan,
- Bill Consolidation Programs,
- Easier Credit and Income Qualifications,
- Low credit score requirements,
- Competitive rates for borrowers with a Bankruptcy older than two years,
- Competitive rates for borrowers with a Foreclosure or Short-sale older than three years,
- Refinance your Mortgage at Competitive Rates, even with a History of Late Mortgage Payments, if Directly Due to Adjusting Mortgage
Just for the record, in Maricopa County (Arizona), my personal backyard, the single family maximum for FHA is $346,250. Every County in the country that is a “high cost area” according to FHA has specific limits. To find your area limits go to http://themortgagereports.com/loan-limits
The HOUSING ONLY MAXIMUM RATIO is 31% of the borrower’s gross monthly taxable income (the total monthly payment for the loan that you are applying for, which includes P&I (principal and interest to cover the loan) taxes, insurance and the FHA mortgage insurance policy, divided by the borrower’s gross monthly taxable income).
TOTAL MAXIMUM RATIO is 43% of the borrower’s gross monthly taxable income (include the total proposed house payment and add all monthly debts divided by monthly gross taxable income). The debts will include credit card minimum payments, car loans, student loans and any other debt that shows on your credit report. If you pay for day care for minor children, that’s a debt that they will include if both spouses work, or if the borrower is a single parent. Things that are not included are utility payments, grocery bills, personal life, health and car insurance payments, lawn care, pool service and the like.