Defining an FHA Mortgage

Everyday consumers are bombarded with media in the way of television commercials and radio commercials.  We see billboards as we drive down the interstate; we see newspapers, magazines, electronic media and so much more.  So, with the information overload we get, do we really know what an FHA mortgage is? Or, is it just a term we hear all the time that we just think sounds good?

An FHA mortgage is a mortgage that is backed by the Federal Housing Administration.  FHA itself does not loan money, but there are lending institutions such as banks and sometimes credit unions that loan money.  FHA mortgages are insured by the government; so, this is good news for the lender.  FHA guarantees the lender that they will pay the loan off if the borrower defaults.

This reduces the risk for the lender overall, so it allows the lender to offer more competitive interest rates.  Getting lower rates is not the only benefit of an FHA mortgage.  A lower down payment is also a great benefit of an FHA mortgage for those who are buying.  An FHA mortgage requires as little as 3.5% down, whereas a conventional mortgage would require anywhere from 5% to 30% down.  FHA mortgages also have a commonsense approach to underwriting, meaning they look at the bigger picture.  The lenders do have a little more flexibility in who they can lend money to, so it allows them to consider other things outside of the past history of the borrower.  While they won’t lend on poor credit, they don’t necessarily go by the credit score.  They are interested in how accounts are paid, and they look closely at your history over the past 12 to 18 months.  They won’t hold it against you if you had a collection five years ago. 

Conventional loans are extremely stringent, so unless you have perfect pay in every single account you have, and have a wallet full of cash then an FHA mortgage may be the best option for you.  With the economy the way it is, it does offer some good buys for homeowners, but it’s best to keep in mind that we need to be lending and borrowing responsibly.  Regardless of the proposal for the home you are looking at, if you are not comfortable with anything regarding the process you need to say so. 

Remember, FHA itself is not guaranteeing that every consumer will get a loan, and they aren’t granting the loan themselves.  FHA simply insures the loan, meaning they promise to pay the loan when the borrower defaults on the loan.  This insurance to the lender doesn’t guarantee that everyone will be approved for an FHA mortgage; those who apply will still need to qualify based on their income, credit and abide any FHA guidelines regarding the property.