Friday, March 9, 2012

FHA Loans Actually Aren’t

By the end of February, The Wall Street Journal felt confident enough to print a headline shrieking, “At Last! Banks Rev Up Lending”. But that doesn’t mean that FHA loans aren’t going to continue to be important to the local real estate market. To be perfectly clear, let’s get some terms straight. “FHA” stands for the Federal Housing Administration. And “FHA Loans” aren’t. 

Aren’t loans, that is. 

The term “FHA loans” actually refers to loans made by entities other than the FHA. If that isn’t contradictory enough, the banks and other loaning entities are called ‘FHA Lenders’ (the ones who aren’t, actually). The reason behind the naming contradiction is that these mortgage loans are only guaranteed by the FHA – that is, insured by it, not funded by it.   

The FHA offers to act as an insurer in order to lower the risk to the actual mortgage lender. Since the availability of FHA insurance makes it less hazardous for those lenders to grant people mortgages, the ultimate effect (and intention of FHA loans in the first place) is to make it easier for potential homeowners to obtain a mortgage, thereby freeing up the kind of large capital that mortgage loans usually involve. FHA loans help ‘unlock’ the real estate market, allowing people to move in and out of residences more freely.  

FHA loans can be a good deal for some people, but as with most financial alternatives, there are both pros and cons to the program.  A key advantage of FHA loans is that potential buyers with marginal credit scores can more readily quality to get them. FHA loans also carry relatively low interest rates, and because they are based on the good credit and massive financial power of the federal government (AKA taxpayers), down payments and closing coats for FHA loans can be kept low.  

FHA loans are quite common, yet not a good fit for everyone. For home buyers with good credit scores, other private mortgage insurance options are available. In some cases their premiums may be lower than comparable FHA premiums. As is well known, the FHA also places a limit on the size of a mortgage it will guarantee. If your transaction involves a larger “jumbo” mortgage, FHA loans won't be available.  

When you are thinking about buying a home, being aware of current FHA rules as well as area mortgage insurance rates is a good place to start. My office is here to help you with these and all of the other current intelligence we take into account when helping you find a property and structure the most favorable terms for your local real estate purchase.

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