FHA Mortgage

Federal Housing Administration Mortgage

A mortgage provided by the Federal Housing Administration. The FHA offers several different types of mortgage, including (but not limited to) fixed-rate mortgages, adjustable-rate mortgages, energy efficient mortgages, and so forth. There are various requirements to be eligible for an FHA mortgage, including steady or increasing income for at least two years and at least two years since a bankruptcy.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

FHA Mortgage

A mortgage on which the lender is insured against loss by the Federal Housing Administration, with the borrower paying the mortgage insurance premium.

What FHA Does: By insuring lenders against loss in the event that borrowers default on their loans, FHA encourages lenders to make loans that they might otherwise view as too risky.

FHAbegan operations in the depths of the depression of the 1930s when lenders had stopped making new loans altogether because a sizeable proportion of existing loans were in default. As the country worked its way out of the depression, the FHA settled into the principal role it has today: helping a segment of the low-and-moderate-income population become homeowners who otherwise might not make it because they have shaky credit, or can't come up with the cash needed for the down payment.

Some FHA programs are subsidized. For example, a special program of mortgage insurance for members of the armed forces is
subsidized by the armed forces, while special programs for older declining urban areas and for displaced households are partially
subsidized by FHA through insurance premiums that don't cover losses. Its standard (Section 203b) program, however, was designed from the beginning to be self-supporting out of the insurance premiums paid by borrowers. When during the late 80s rising defaults eroded the reserves that FHA maintains to pay losses under this program, the insurance premiums were raised substantially to restore the reserves to an adequate level.

FHAloans are subject to size limits, which vary from state to state and county to county. In 2003, the basic limit was $154,896 but it ranged up to $280,749 in high-cost areas. The limits by state and county are raised every year and can be found at https://entp.hud. gov/idapp/html/hicostlook.cfm.

Who Should Take an FHA? FHA loans are for borrowers who can't meet a 5% down payment requirement and have poor credit. Borrowers who can put 10% or more down and have good credit will do better with a conventional loan. The best loan type for borrowers who fall in the middle depends on the specifics of the case.

The great appeal of the FHA program is that it allows 1% down. Private mortgage insurers, in contrast, require 5% down on most loans and only allow 3% down on special programs. FHA is also liberal in allowing gifts to be used for paying settlement costs. See Down Payment/Home Seller Contributions.

FHAborrowers may also have weaker credit than private insurers accept. FHA allows higher ratios of expense to income, is more tolerant of existing debt and will allow the income of co-borrowers who don't live in the house to count fully in measuring income adequacy. It is also quite forgiving about bad credit. For example, a borrower need be out of a Chapter 7 bankruptcy for only two years and out of a Chapter 13 bankruptcy for only one year.

FHA loans are generally available in the market at about the same interest rate and points as conventional loans with the same term. There may be a difference in mortgage insurance premiums, however.

On an FHA 30-year fixed-rate mortgage (FRM), the mortgage insurance premium in 2003 was 1.5% of the loan amount paid up front plus .5% of the loan balance paid monthly. The premium is the same regardless of the down payment.

On conventional loans, the insurance premium depends on the down payment. With 5% down, the premium on a 30-year FRM is about the same as on an FHA. With 10% or more down, the premium on conventional loans is lower.

Borrowers who are unable to make a down payment but have strong credit have another option. Conventional loans are available with no down payment and no mortgage insurance, but borrowers pay a higher interest rate. Cash-poor borrowers with good credit should explore this alternative to an FHA. Veterans also have the option of a VA-guaranteed loan. See VA Loans.

Some loan officers steer borrowers into FHA loans who would do better with conventional loans. Either they specialize in FHAs and don't want to lose a sale, or they can earn a higher fee on an FHA, or both. If you can put 5% down, or you have good credit (a FICO score of, say, 700 or higher), don't let anyone steer you to an FHA without considering alternatives.

FHA Loans Are Assumable: Both FHA and VA loans have the advantage that they can be assumed by a qualified buyer. If a house is to be sold with an FHA or VA mortgage carrying a rate well below the current market, the seller can enhance its marketability by allowing the buyer to assume the old mortgage. Conventional loans carry due-on-sale clauses that require the loan to be repaid when the house is sold. See Assumable Mortgage.

FHA and House Quality: Homebuyers often assume that FHA's involvement as the mortgage insurer protects them against defects in the house. It doesn't. FHA has been bedeviled by this problem since it began operations in 1934.

The assumption that FHA protects the homebuyer is reasonable. FHA requires a property appraisal and that homes meet certain “minimum property requirements.” In 1999, furthermore, FHA adopted a new set of rules regarding appraisals that it trumpeted in PR releases as a Homebuyer Protection Plan. The fact is, however, that FHA does not guarantee the value or condition of a home. FHA appraisals are to protect FHA, and homebuyers should protect themselves by ordering a home inspection.

In 2000, FHA developed a form that all purchasers of existing houses taking an FHA mortgage must sign before the date of the sales contract. The form is entitled: “For Your Protection: Get a Home Inspection.” Immediately above the signature, it reads:

I understand the importance of getting an independent home inspection. I have thought about this before I signed a contract with the seller for a home.

The Mortgage Encyclopedia. Copyright © 2004 by Jack Guttentag. Used with permission of The McGraw-Hill Companies, Inc.
References in periodicals archive ?
Here's how an FHA mortgage can be obtained without a credit report:
The FHA mortgage insured fixed rate loan has a term of 27-years and is collateralized by the issuance of Ginnie Mae securities.
This is our first time buying a home, and our Realtor says we should get an FHA mortgage. He just says it's the best kind for us.
(1) These remarks followed a remarkable increase in the scope of the FHA mortgage insurance program in response to the financial crisis and housing bust.
If your credit isn't good enough to qualify for a conventional loan, a FHA mortgage may be an option.
13 DOJ press release stated, "As a result of Regions' conduct and ommissions, HUD [the Department of Housing and Urban Development] insured hundreds of loans approved by Regions that were not eligible for FHA mortgage insurance under the [Direct Endorsement Lender] program and that HUD would not otherwise have insured.
Although the standards for FHA originations have improved substantially in that originations to the deep subprime segment stopped and originations to near-prime and prime segments increased, the performance of the overall FHA mortgage market has not improved.
• .5% FHA Mortgage Insurance Cut - Soon afterwards, FHA announced a dramatic reduction to monthly mortgage insurance premiums for FHA loans, immediately placing them on a more competitive footing with the new 97% conforming loans.
"Existing homeowners who refinance into an FHA mortgage will see similar reductions to their mortgage payments as well.
In addition to already being a FHA mortgage lender, Richman recently received approval to be an FHA MAP mortgage lender.
cfm to find out the maximum amount you can borrow with an FHA mortgage in your area.