FHA Mortgages

An FHA loan or mortgage is a federal assistance mortgage loan insured by the Federal Housing Administration which can be delivered by federally qualified lenders. FHA loans have traditionally enabled Americans with lower incomes to borrow money for the purchase of a home that they would not be able to afford without such help. The program was developed originally in the 1930s when foreclosures and defaults were rising sharply and lenders needed some type of insurance. The government subsidized many of the FHA programs but the goal was for the system to be self-supporting with insurance premiums paid by the borrowers. With the passage of time, private mortgage insurance (PMIs) companies entered the system and now FHA primarily is targeted at people who cannot afford a conventional down payment or otherwise do not qualify for PMI insurance.

It’s important to remember that the FHA does not make loans. Basically, it simply insures loans made by private lenders.  The first step in obtaining an FHA loan is to contact several lenders and or mortgage brokers, and ask them if they deal in FHA loans. Because each lender establishes their own rates and terms, it’s important to make comparisons.

As stated earlier, FHA's mortgage insurance programs help low- and moderate-income families become homeowners by decreasing some of the costs of their mortgage loans. By protecting the lender against loan default on mortgages for properties that meet certain minimum requirements, FHA mortgage insurance encourages lenders to make loans to borrowers and projects that might not otherwise be able to meet conventional underwriting requirements. The basic FHA mortgage insurance program is Mortgage Insurance for One- to Four-Family Homes.

FHA administers a number of programs, based on Section 203(b), that have special features. One of these programs, Section 251, insures adjustable rate mortgages (ARMs) which, particularly during periods when interest rates are high, enable borrowers to obtain mortgage financing that is more affordable by virtue of its lower initial interest rate. This interest rate is adjusted annually, based on market indices approved by the FHA, and so it may increase or decrease over the term of the loan. In 2006, the FHA received approval to offer hybrid ARMs, in which the interest is fixed for the first 3 or 5 years, and then adjusted annually.

For more information on ARMs (adjustable rate mortgages) visit our page dedicated to that topic.