The Federal Housing Administration (FHA) does not make loans directly to borrowers but rather provides insurance on loans made by approved lenders. FHA-insured mortgage can be obtained for single-family, multi-family, manufactured and mobile homes and hospitals.
FHA loans are different from conventional loans in a number of ways. The down payment requirements are much lower than conventional loans. FHA loans have lower credit requirements than conventional loans, making them more available to a wider range of potential homebuyers. Unlike conventional loan, which ordinarily required 10-30% down payment, FHA-insured loans only require 3.5% down payment. Gifted funds can be used as down payment, An outright gift of cash investment is acceptable if the donor is the borrower’s relative, the borrower’s employer or labor union, a charitable organization, a governmental agency or public entity that has a program to provide homeownership assistance to low-and moderate-income families or first-time homebuyers. No repayment of the gift may be expected or implied. The calculating factors are much more flexible to determine whether or not to approve the loan, factors such as household income, lower credit scores and repayment ratios.
Most people associate FHA loans with purchase money transactions. While purchase are the most common use, FHA loans are available for rate and term refinance loans, Cash Out refinances and Streamline program.
FHA mortgage insurance appeals to lenders because it protects them against loss should the borrower default on the loan. That is the key difference between FHA and conventional mortgages. The borrower is the one who pays for the mortgage insurance, usually by having it folded into their monthly payment. This cost typically drops off when the balance remaining on the loan is greater than three-quarters of the property value or after 5 years, which takes longer.
The FHA was created in 1934 by congress to help Americans obtain mortgage and purchase homes. In 1965, it became part of the U.S. Department of Housing & Urban Development (HUD).
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