FHA Home Loans Emerge As A Cheap Alternative For Low-Credit Score Homeowners

The U. S. Department of Housing and Urban Development (HUD) has a sub group called the Federal Housing Administration (FHA). The FHA is a by-product of the National Housing Act passed in 1934.

Actually, the FHA does not lend money, nor does it build houses. This administration is in existence to help lenders mitigate their losses should the property owner default.

The public hears about “FHA loans” even though that is not a correct label. The FHA is actually backing the lender’s loan. Therefore, the FHA loan should more appropriately be referred to as an “FHA-insured” loan.

Because of the FHA guarantee to back loans, more lenders might grant loans that they would not consider without such backing. With this backing, lenders could feel more secure about granting the loan. Borrower rates may stay lower in such situations.

FHA loans are often used by borrowers with less-than-20-percent downpayments and, therefore, tend to require mortgage insurance payments. For FHA loans above 80%, mortgage insurance rates are 0.50% annually (paid monthly) with an up-front payment of 1.5% against the loan size and due at closing.

Homeowners with 15-year fixed FHA loans, however, are exempt from the annual insurance payments.For all homeowners, though, when the loan balance reaches 78 percent of the home’s value, the annual MI is no longer required.

Mortgage rates for FHA loans are typically higher than comparable conforming mortgages but because of new, risk-based pricing from Fannie Mae and Freddie Mac, homeowners with credit scores under 680 are finding FHA a viable alternative. And often with lower rates.

Source FHA Loan Wikipedia, April 1, 2008 http://en .wikipedia.org/wiki/FHA_loan