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FHA Loans - A Guide to FHA Mortgage Loans

by Brandon Cornett

The FHA home loan program has helped many Americans buy homes over the years. But while the program helps many people, it's not applicable for every home buyer. In this article, I'll explain what an FHA mortgage loan is, how it works, and how to find out if you're eligible for one.

If you haven't yet heard of an FHA loan you soon will. That's because recent actions by the federal government will make these loans available to a larger number of Americans, particularly those who are at risk of losing their homes to foreclosure. So as the media continues to cover troubles with the housing market, you can bet they'll be talking a lot about FHA-backed mortgages as well.

We will talk more about current events and legislation later on. For now, let's talk about what an FHA home loan is and how it works.

FHA Mortgage Program Explained

Let's start with a basic definition of this program, just so we are all on the same page. An FHA loan is simply a mortgage loan that's insured by the Federal Housing Administration (FHA). The program is available to home buyers (and, more recently, homeowners) who meet certain qualifications / guidelines. There are limits to how much you can borrow through an FHA home loan, but even so they are typically big enough to cover a modest home purchase.

The Federal Housing Administration (FHA) is a government program created in 1934 to make home financing available to more American families. Today, it's part of the Department of Housing and Urban Development (HUD). Basically, they insure home loans made by private lenders. With this government backing, lenders are more willing to offer mortgages to people they wouldn't normally qualify, due to credit problems or other factors.

Note the distinction here. The FHA does not actually make home loans — rather, it insures loans that are made by traditional lenders. If the borrower / homeowner ends up defaulting (missing payments) on the mortgage down the road, the lender knows it will be paid from the FHA's insurance fund.

So to restate our definition: An FHA loan is basically a mortgage loan made by a private lender that is insured by the Federal Housing Administration.

How active is the FHA program? Very active. As a component of HUD, the organization has insured more than 34 million mortgage loans since 1934. That equates to more than 450,000 loans insured each year since 1934. That's a lot of homeowners who have the FHA to thank, whether they realize it or not.

The Benefits of These Loans

According to the FHA's official website, the major advantages of an FHA loan include (A) an easier qualification process for borrowers, (B) a lower down payment out of pocket, and — for those borrowers with bad credit or small cash reserves — (C) a greater chance of qualifying for the loan in the first place.

With regard to that last bit about bad credit ... that could very well change soon, if it hasn't already. Mortgage lenders have new restrictions on how they qualify a person for a loan, with regard to the person's credit score. This too is a result of the subprime mess that recently came to a head. Of course, the federal government can get around its own rules, so the FHA loan program might still be a viable option for buyers with bad credit.

Loan Requirements for the FHA Program

Of course, there are guidelines and requirements for this program, and not everyone will qualify. There are actually two types of requirements, based on your scenario:

• For homeowners -- If you currently own a home and are at risk of losing it because of higher interest rates (like an ARM loan that adjusts), you might qualify for an FHA refinance loan that could get you into a lower fixed-rate loan. See notes below about the Housing and Economic Recovery Act.
• For home buyers -- If you are buying your first home and cannot afford a full down payment, of if you have shaky credit, you might qualify for an FHA loan for the purchase.

In other words, the program is typically used for buyers who are not able to qualify for a traditional loan, and (as of late) homeowners who are at risk of foreclosure following a rate hike on their mortgage. If you have great credit, make plenty of money, and could easily afford the down payment on a home ... you probably won't qualify for the FHA program.

The Housing and Economic Recovery Act of 2008

As a result of the mortgage crisis that came to a head in 2007 - 2008, the federal government passed new legislation to help struggling homeowners avoid foreclosure. The program is backed by the Federal Housing Administration, so it's basically an extension of the FHA home loan program.

Essentially, this program is a way for homeowners to refinance their mortgages into a fixed-rate loan with a lower interest rate. This will in turn reduce their monthly payments, which is a fundamental step in avoiding foreclosure. And one thing is certain — our economy cannot handle foreclosures at the rate they've been happening lately. So the Recovery Act could be a great thing. Only time will tell.

You can find out if you're eligible for the new FHA refinance loan program by clicking the button below.

I hope you have found this tutorial helpful. For more information on the various types of mortgage loans, click here.

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About the Author Brandon Cornett is a real estate writer and the publisher of Home Buying Institute. He has been educating consumers on housing-related topics since 2004.