By: Nick Kent
Have you been looking for financing on a new home, but struggling to find anything reasonable? With subprime mortgages a thing of the past, if you have less-than-perfect credit an FHA loan may be just what you need. An FHA loan is a federal assistance mortgage loan, backed by the Federal Housing Administration that insures lenders against loss, incase the borrower is unable to meet the terms of the loan. And because it provides protection to lenders, it allows borrowers to purchase a home who might not otherwise be able to do so, at a reasonable rate. Created as part of the National Housing Act of 1934, when defaults and foreclosures were on the rise, the FHA was designed to facilitate various loan insurance programs, as well as increase home production, and provide jobs. The Federal Housing Administration does not make loans directly, nor build houses, but is in place to oversee projects involving those things on a broader level, as well as providing insurance to lenders. Due to the wide availability of Private Mortgage Insurance companies these days, FHA loans aren't being utilized quite as often as they were in the days of their inception, and tend to best serve lower income Americans, who may otherwise find it difficult to acquire private mortgage insurance, or are unable to provide the necessary down payment for a conventional home mortgage. Typically, when applying for a loan, the lender will ask whether or not you'd like to apply for FHA loan insurance, and if so will guide you through the application process. The FHA then evaluates the borrower, based on several factors including debt-to-income ratio, as well as credit history. If the risk is deemed acceptable, they will subsequently insure the lender in case the borrower fails to meet the terms of the loan. The borrower typically pays a premium for the insurance, of one-half of one percent. This situation can benefit you in several ways. First off, you receive an expert appraisal by an official FHA appraiser, assuring an accurate valuation, so you won't have to worry about paying too much for your new home. Also, because the lender has the extra peace of mind provided by federal insurance, they are typically willing to allow you to borrow at a much lower rate than had the FHA not agreed to provide insurance for your loan. The FHA also administers various programs with special features, such as the ability to insure adjustable rate mortgages (ARMs). Unlike conventional fixed rate loans, adjustable rate mortgages have interest rates that are adjusted anually, potentially enabling borrowers to purchase or refinance their home at a lower rate. The FHA was approved to back hybrid adjustable rate loans, in which the rate stays the same for the first three or five years, then adjusts anually. As I mentioned, the FHA doesn't directly make loans. What this means is that different lenders offer different terms, and different rates. Some are very competitive. Some aren't. It's important for you to shop around. Call lenders and inquire as to whether or not they originate FHA home loans. It might take some time, but doing a little homework will make a world of difference to your financial future.
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