FHA, also known as the Federal Housing Administration,
operates under the control of the Department of Housing and Urb
an Development (HUD) and has the primary responsibility for
administering the government home loan insurance program. This program
allows buyers who might otherwise not qualify for a home loan to obtain
one because the risk is removed from the lender by FHA.
The most popular FHA home loan
program nationwide is the 203(b) FHA home loan that only requires a
minimum of 3% from the borrower and permits 100% of their money needed to
close to be a gift from a relative, non-profit organization, or government
agency.
The main advantage to a FHA home
loan is that the credit criteria for a borrower are not as strict as FNMA
or FHLMC. Someone who may have had a few credit problems should not have a
problem obtaining FHA financing. Also, FHA home loans are assumable,
allowing a person to take over the mortgage without the additional cost of
obtaining a new loan. In addition, the seller must pay for part of the
"traditional" closing costs (called non-allowable costs) while a
borrower's allowable costs can partially be wrapped into the loan. 100% of
the down payment and closing costs can be gifted.
The greatest disadvantage of FHA
home loans is the upfront mortgage insurance premium (MIP). On a 30 year
FHA home loan that equals to 2.25% of the loan amount (2% for a 15 year)
in addition to the 0.5% annual renewal premium that a borrower will pay
for the life of the loan. In addition, FHA limits the amount a borrower
can borrower.
