What is FHA?

What is FHA?

What is FHA?

Categories: None | Tags: First Time HomebuyerFha 203kGlossaryFhaGlossaryLoans

What is FHA?
FHA stands for the Federal Housing Administration.  It is a federal housing agency that promotes home ownership in the United States by insuring mortgage loans originated by FHA-Approved lenders.

FHA was established in 1934 in order to promote mortgage lending in the US.  In 1965 FHA was made a part of the U.S Department of Housing and Urban Development (HUD).

Prior to FHA, it was common for mortgage lenders to require a down payment of 50%!  Since many families could not save up such a large down payment, the majority of households in the United States were not able purchase a home.

What are FHA Loans?
FHA provides mortgage insurance in order to reduce the risk an FHA-Approved mortgage lender assumes when they make a residential loan that conforms to the FHA lending standards.  FHA insures loans made on a wide variety of single-family and multi-family properties.

Today FHA makes it possible for households to buy a home with as little as a 3.5% down payment.  FHA also has more flexible lending standards which helps FHA-Approved lenders make loans to first-time homebuyers that they otherwise may not be willing to make.

FHA’s most common type of loan is the 203(b) loan which is limited to single-family properties with 1-4 units.

FHA also offers a popular loan to finance the purchase and renovation of a home referred to as a FHA 203(k) loan.

How FHA works?
FHA is a self-supporting federal agency.  FHA generates revenues by collecting mortgage insurance premiums from FHA borrowers.  These revenues are used to cover any losses incurred by the lender if a borrower is not able to fully repay the loan and the lender has to take the property back.

In the event that a property must be foreclosed upon, the FHA-Approved lender can recover most, if not all, of their costs associated with foreclosing and selling the FHA insured property.

In many cases the FHA-Approved lender will foreclose on the property and then transfer the title to the U.S. Department of Housing and Urban Development (HUD).  HUD then resells what they refer to as a “HUD Home” to a new owner who may be an owner occupant or an investor.

How to buy a HUD-owned home?
If HUD takes title to a property from an FHA-Approved Lender, HUD will prepare and sell the HUD Home on the open market.  A full listing of HUD Homes is available on their web site, www.HUDHomeStore.com.

HUD will typically do only minimal repairs to the HUD Homes it acquires.  This means that the HUD Homes may or may not meet FHA’s minimum property standards at the time they are being resold.   The HUD Homes website will clearly state whether the property is or is not eligible for FHA-insured financing depending on the condition of the property.

If a property is not eligible for FHA-insured financing, a homebuyer will need to either pay cash for the property or they would need to use a purchase and renovation loan like the FHA 203(k) loan from an FHA-Approved lender.

2018-06-14T07:50:16+00:00

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