What is FHA?
FHA stands for the Federal Housing Administration. It is a government organization that provides insurance on loans to protect FHA approved lenders.
Because FHA helps reduce the risk to lenders, they are willing to make loans to people that they may have otherwise not been willing to. Lower credit and income requirements mean that more people have the opportunity to buy a home.
What is an FHA Loan
An FHA loan is a loan made by any approved lender under the FHA program. This means that the lender’s investment is protected by FHA, allowing the lender to take on more risks than they might normally take on.
These additional risks include:
- Loans with low down-payments
- Lending to borrowers with lower credit scores
- Lending to borrowers with a history of bankruptcy or foreclosure
- Lending to borrowers with higher debt-to-income ratios
How Does FHA Guarantee a Loan
When FHA guarantees a loan they are agreeing to buy the loan from the investor if the borrower defaults. In essence, the FHA is an insurer for these loans.
They take on the risk and in return charge insurance premiums to the borrower. These premiums come in two types:
- Upfront Mortgage Insurance Premium – This upfront amount is added to the loan amount. This premium is calculated at 1.75%.
- Annual Mortagage Insurance Premium – This is charged monthly over the entire life of the loan. On loans that include a 3.5% down-payment, this premium is calculated at .85% per year.