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Basics of Federal Housing Administration (FHA) loans


By Sadiya Anjum

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Government loans or government-backed loans are specially designed to improve the condition of the population and provide better terms than conventional loans. Federal Housing Administration loans, commonly known as FHA loans, are government-backed mortgages that provide favorable terms to an individual looking for financing.

FHA loans are provided to those individuals with low or moderate income who may not qualify for conventional loans. FHA loans are not government loans but are in fact loans which are insured by the government. It basically means that if an individual defaults on this loan, then it is the government’s responsibility to pay the lender. But the individual has to pay premiums (generally up to 5 years of the loan) to obtain cover.

FHA loans offer various packages: for first time homeowners, refinancing with a home improvement loan (combined as one loan), energy improvement in a home, mobile homes, manufactured homes, single and multi-family homes etc. They also offer cash for equity for the elderly (above 62 years) who have homes with no or low loan balance. Even though FHA loans are designed to cater to different people and for different kinds of homes, these loans are provided to borrowers who intend to use the home as their primary residence.

The benefits of an FHA loan are many. It is possible to get lower interest rates in comparison to conventional loans. The down payment required is also just 3% as opposed to the conventional 10% and above. It is also possible to get loans for zero down payment. The closing costs are also minimized and can be included in the loan itself.

But the weakness of FHA loans lies in the loan limit placed. If you are looking to finance a secondary residence or a vacation home, FHA loans will not be of aid. The debt to income ratio should not exceed 41% of the monthly income and the front end ratio is limited to 29%. This means that an individual can obtain a home loan (includes principal, interest, taxes and insurance) only up to 29% of his monthly income.

FHA loans are still a good option for people with low to moderate incomes. It takes little to qualify for an FHA loan. It requires the individual to have a moderate to good credit score. In addition, the person should have steady income; income from a job is counted as long as the person has been holding the job for about 2 years. When calculating debt to income ratio, the individual has the option to include other income sources such as alimony or child support.

FHA loans can be obtained from any federally qualified lender. It is one of the most sought after government loan plans as it has helped thousands purchase homes. Individuals who cannot afford homes have been able to buy homes with an FHA loan.

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