FHA Home Loans Emerge As A Cheap Alternative For Low-Credit Score Homeowners
The U. S. Department of Housing and Urban Development (HUD) has a sub group called the Federal Housing Administration (FHA). The FHA is a by-product of the National Housing Act passed in 1934.
Actually, the FHA does not lend money, nor does it build houses. This administration is in existence to help lenders mitigate their losses should the property owner default.
The public hears about “FHA loans” even though that is not a correct label. The FHA is actually backing the lender’s loan. Therefore, the FHA loan should more appropriately be referred to as an “FHA-insured” loan.
There are some lenders who would ordinarily deny mortgages, except for the FHA guarantee. Because the FHA will back the mortgages, lenders may feel more comfortable granting the loan. Mortgage rates for these borrowers stay low.
An FHA loan may be worth considering if a borrower needs a loan that is less than 80% of the property value. This would mean that the borrower has a down payment less than 20%. If this is the case, there will be mortgage insurance payments required which will be 1.5% paid at closing against the loan and 0.50% annually which is paid monthly.
Homeowners with 15-year fixed FHA loans, however, are exempt from the annual insurance payments.For all homeowners, though, when the loan balance reaches 78 percent of the home’s value, the annual MI is no longer required.
Mortgage rates for FHA loans are typically higher than comparable conforming mortgages but because of new, risk-based pricing from Fannie Mae and Freddie Mac, homeowners with credit scores under 680 are finding FHA a viable alternative. And often with lower rates.
Source FHA Loan Wikipedia, April1, 2008 http://en.wikipedia.org/wiki/FHA_loan