FHA Loans

Federal Housing Administration, or FHA, aids home buyers in getting mortgages through the FHA-insured mortgage program. While anyone can use the program, it works particularly well for those with who have lower credit ratings, must make a small down payment on a home or are buying a home for the first time.

How It Works

The FHA loan does not come from the FHA. Rather, it comes from a traditional bank and is insured by the FHA. Because of the government backing, banks are more willing to work with borrowers under the program. Credit ratings do not play as strong of a role in the approval process, and buyers can purchase a home with as little as 3.5 percent down. Those with no money available to them may get that 3.5 percent from someone else as a gift and still qualify for the loan.

Types of Loans Offered

The FHA insures a variety of loans through the program. Most of the loans are fixed-rate mortgages, which have a set interest rate that does not change. Some borrowers opt for adjustable rate loans. These loans have an interest rate that changes over time, providing the option to go up at a later date. The FHA SF Rehabilitation Loan program (203k) allows buyers to purchase homes that need work and roll some of the costs of the repairs into the FHA-backed mortgage amount.

Cost of FHA Loans

Mortgage insurance must be purchased with FHA loans. First, buyers pay 1.5 percent upfront as a insurance premium. Then they pay a yearly mortgage premium of 0.5 percent of the mortgage amount.

Comparison to Other Loans

When compared to other loans, FHA makes sense for some buyers. Those with less than perfect credit will get a more affordable interest rate through the FHA loan program, rather than choosing a conventional or sub-prime loan, if approval is even possible. Those with small down payment amounts may find that the FHA mortgage insurance cost is much less than the private mortgage insurance coast (PMI) on a conventional loan. All loans require private mortgage insurance if the down payment is less than 20 percent of the purchase price.