So it's finally time to purchase your dream house! You and your Realtor have found the home and now you just need to secure the financing. This often times can also be the point where most people start to get frustrated. Like any profession, loan officers have their own jargon most of which the general public does not use daily or understand completely. Luckily, there are many great loan officers that will explain and answer any questions you may have. The purpose of this blog, however, is to give you the "bread and butter" on how FHA loans work.

 

FHA stands for the Federal Housing Administration and is part of the U.S Department of Housing and Development. Basically, the FHA is around to better help the general public obtain home ownership. The FHA does this by insuring loans which then allows banks to offer affordable financing solutions to the public. The banks can do this because with the government insuring the loan there is little risk. First and foremost, it is important to understand the role FHA has in loan origination.

 

The FHA does not actually make the loans that allow you to buy your home. That is the job of the bank that you are working with. What the FHA does, is insures the bank that if for some reason you default on your payments they will be covered. So basically it gives the banks insurance which then in return makes you less of a risk. Once the FHA has insured your loan and the loan has been made, often times it is sold in the secondary market. The buyers of these loans typically are either private investors ( mainly larger banks ) or GSE's (Government Sponsored Enterprises, aka Freddie Mac, Fannie Mae) and Ginnie Mae which is separate as it is wholly government owned .Your loan is then grouped/pooled with other home loans "securitized" and sold to investors as a single investment. What this whole secondary market does in short, is allows banks to have an avenue to sell their existing loans so they can make new ones to buyers like you…the grease that keeps the wheels moving. So now we got the process down, so how does this relate to you as the buyer?

 

FHA loans allow buyers to put down as little as 3.5%. This down payment can be received as a gift from a family member, employer or charitable organization. They also are typically much more flexible in terms of credit scores when compared to a conventional loan. If the applicant has little or no credit you can have a blood relative co-sign the loan. The FHA loan usually comes with an attractive interest rate which lowers the cost of home ownership. Whenever you go to sell the home, the FHA loan could be assumable to the next buyer (subject to meeting credit standards). Lastly, the FHA wants people to keep their house and in the event of tough times they can offer clients many different and helpful options

  

One last thing to consider, nothing is free! There are various costs associated with obtaining an FHA loan including and not limited to monthly mortgage insurance premiums and up front mortgage insurance costs. If the benefit outweighs the cost this may be a great option to consider.

 

 

*This blog serves to give general knowledge of FHA loans and may not represent the most current information on requirements. You should contact a mortgage professional for details or questions regarding specifics and costs.