What is an FHA Loan?

The FHA Loan is a government-backed, low down payment mortgage, making homeownership affordable and accessible for many Americans. An FHA Loan is an excellent option for first-time homebuyers, as the required minimum down payment and credit score requirements are much lower than other mortgage rates. This loan lets those with limited savings for down payments or credit challenges achieve their dream of homeownership.

How do FHA Loans work?

The FHA loan functions like any other home loan in the US for the buyer. Buyers borrow the funds to purchase their home, agree to specific monthly payments, and choose to pay back the loan over 15 or 30 years. However, three features make the FHA Loan stand out:

• A down payment minimum of 3.5% (with a credit rating of 580).
• A minimum credit rating of 500.
• Loan limits are based on your county.

FHA loans do not come with any penalty for selling the home before it is fully reimbursed, and buyers can pay off loans faster or refinance it if needed. FHA loans are also assumable, meaning if the buyer sells the home, the new owner can utilize the original FHA mortgage and interest rates as the previous owner. This is another bonus for this loan type, as the locked-in interest rates are likely lower than the future rates when you may consider selling the home.

The FHA backing of this loan type means they insure the mortgages issued by lenders. In the case of default, the FHA insurance will cover it. This backing allows FHA lenders to provide the buyers with better terms.

The last key factor that separates an FHA Loan from other loan types is mortgage insurance, regardless of the down payment amount. If the homebuyer paid less than 10% on the down payment, they must remain covered by FHA mortgage insurance until the loan is paid off. If one chooses to refinance into a non-FHA loan, they will no longer be required to carry that coverage. If more than a 10% down payment is paid, the mortgage insurance is required for 11 years instead of the loan’s entire life.

The History Behind the FHA Loan

The Federal Housing Administration (FHA) was created when the National Housing Act was passed in 1934e as part of the New Deal. In response to the Great Depression, the goal of the FHA was to address the housing market bubble burst and a wave of foreclosures ripping across the nation during this time.

Before the FHA formed, the typical down payments on homes were around 50% of the home’s purchase value. Banks did not have the confidence to issue loans for anything less than this value, with unemployment at historic levels. The initial function of the FHA was that of an insurance agency for banks. Creating a stopgap by backing loans for banks and allowing a more considerable demographic of people the ability to afford homes, the FHA brought the housing market back from the fallout of the Great Depression.

Since its inception, the FHA has remained a vital force in the housing market. The FHA is the largest insurer of mortgages globally, insuring loans for about eight million single-family homes.

Wrapping Up

Since its creation in the 1930s, the FHA loan program has maintained affordable homeownership. Depending on the situation, an FHA loan might be the deciding factor for those considering homeownership. While shopping for a mortgage, review all options and select the one that provides the most benefit.