FHA Mortgage Definition

What Is An FHA Loan?

The Federal Housing Authority (FHA) opened its doors in the wake of the Great Depression in 1934. FHA mortgages have served the public well. In today's market, FHA down payment requirements have eased to around 3 percent. Conventional mortgages are currently looking for 20 percent down, well out of reach for most first time homebuyers.

The FHA has engaged the consumer since the outset of the Great Recession of 2007-2008. The down payment requirements for Fannie Mae and Freddie Mac are more stringent than the FHA.

FHA mortgages are not loans made by the FHA, a division of HUD. The FHA insures mortgage loans made by bankers. In 2007, the FHA added a new product called the FHA-Secure. This financial tool was designed to specifically help homeowners who took losses in the subprime mortgage crisis. The FHA will permit the buyer to receive a credit for many of the closing costs.

In 2008, another new product, called the FHA Forward program was launched. This mortgage vehicle was approved by President Bush and increased the limits of mortgages the FHA could insure. FHA Forward was subsidized by proceeds from the Bush stimulus plan.

Applying for an FHA loan begins with a lender of choice who participates in the FHA mortgage program. Owner occupied homes with no more than 4 units can be insured by the FHA. The purchaser files an application with the lender.

In accordance with the new Truth In Lending Act (TILA), the lender is obligated to issue a full disclosure document detailing the annual percentage rate (APR) and all expenses related to the loan. Disclosure will include expected fees or points for processing the loan as well as appraisal fees, title insurance, recoding feeds and other components from the lender.

Gone are the days of low document loans. Gone are the days of unverified income. And, gone are the days of closing day surprises. While TILA promotes a more transparent process, it does not regulate the interest rates of fees associated with the loan. Smart buyers apply to at least banks and compare the disclosures before completing the application.

When applying for a mortgage, the lender will qualify the borrower, who will be asked to provide tax returns and other financial documents. The FHA encourages lenders to qualify borrowers with a debt to income ratio. Each banker has their own levels of risk.

After qualifying the borrowers, the lender will assess the risk. Not only will debt to income be calculated but the banker will ask for permission to run the borrower's credit report, for which the buyer will be charged.

If the borrower's Fair Isaac Company (FICO) score is lower than 620, the chances are slim that the lender will approve the loan. This is one reason that prospective buyers often request a copy of their credit report before applying.

The lender will review your timelines in any installment or credit card payments. This payment history is a very important record that can make or break the loan.

If you are qualified, the lender will request insurance from the FHA. The FHA insurance provides the lender a safe haven as the agency is actually insuring the loan. This program is the desired choice for low and middle-income households.

The FHA now offers Non-Owner-Occupied Co-Borrower mortgage insurance. This permits a blood relative to co-sign for the loan. Usually this occurs when the buyer or buyers do not have established credit.