What Is an FHA Mortgage Loan?
FHA mortgage loans are one of the most popular home-buying vehicles that have been offered to date for home purchasers. The flexibility of terms, low down-payment ratios and ease of approval make them one of the best-case scenarios for potential home buyers.
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History
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In 1965, the Department of Housing and Urban Development (HUD) created a program that offered insurance by the federal government to lenders against homeowner default. This created a culture of lending to otherwise unqualified buyers.
Significance
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Long-term wealth is often built by building value and equity in a property. The government's primary objective with the FHA loan insurance program was to create more home buyers who would spend more, which was good for the economy.
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Features
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FHA loans require a minimum down payment of only 3.5%, less stringent credit restrictions than what is found with conventional loans, as well as the ability for funds to be gifted from relatives, assisting homeowners in making a home purchase a reality.
Misconceptions
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A common misconception with FHA loans is that the loan is given directly from the government. Not so; in fact, the loan is underwritten by FHA for insurance purposes in the event of default. However, banks are still the lender in this scenario.
Warning
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When selecting a home for purchase it is important to factor mortgage insurance protection (MIP) into your monthly payment. This fee is mandatory per FHA underwriting guidelines and is equivalent to 0.5% of your loan amount per year. This can change monthly payments by as little as $40 per month or as much as $200 per month dependent upon your loan amount.
Expert Insight
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Prior to deciding on an FHA loan or mortgage, speak with a licensed realtor or mortgage broker about your circumstances, and allow industry professionals to make recommendations. There are many different loan programs available, and a professional can help you decide which one might be a better fit for your needs.
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