What is an FHA loan?
Information on one of the best financial tools available today

FHA is a very popular route for the first time homebuyer to take. It is not a program reserved only for first time home buyers. You can buy your third or fourth home with an FHA loan. The only stipulation is that you may only have one FHA loan at a time.

The Federal Housing Administration (FHA), a wholly owned government corporation, was established under the National Housing Act of 1934 to improve housing standards and conditions. It's goal was to provide an adequate home financing system through insurance of mortgages, and to stabilize the mortgage market.

Thanks to the insurance products FHA helped to pioneer, such as the long term amortizing loan, the nation's home ownership rate has soared to an all time high of 66 percent as of the third quarter of 1997; well on the way towards the goal of 67.5% by the year 2000.

Today, FHA plays a critical role in financing for minority borrowers, first time home buyers, borrowers who have troubled credit history, and borrowers who have little money to put down on a home.

  • In Fiscal Year 1997, 76 percent of FHA loans originated were first-time home buyers compared to 68.3 percent in Fiscal Year 1995 and 72.7 percent in Fiscal Year 1996.
  • Loan origination's for minority home buyers are increasing. The result is 29% of new homeowners in the past three years.

In keeping with the Government's reinvention efforts, FHA has been very ambitious in innovating, automating, and streamlining the process.

  • Many Single Family mortgage insurance programs have been streamlined. For instance, the Section 203(k) purchase and rehabilitation program has been greatly modified. Lenders, Realtors, and nonprofit organizations across the country have received training on how to make the Section 203(k) program work for them and ultimately for you, the consumer.
  • FHA has undertaken a demonstration in the area of automated underwriting before beginning to design its own automated underwriting tool as automation saves time and it ensures a more uniform treatment of all applicants.
  • In the area of Manufactured Housing, FHA has worked with the industry to ensure that all manufactured homes meet enhanced safety standards.
  • Finally, FHA is using the Internet in its business processes. FHA lenders can now submit information concerning their insurance endorsements electronically to a secured world wide web site called the FHA Connection. FHA homeowners can also access information regarding mortgage insurance premium refunds on the HUD/FHA home page.

FHASecure Refinance

On August 31, 2007, President Bush announced that HUD's Federal Housing Administration (FHA) will launch its newest plan to help America's homeowners avoid foreclosure or delinquency. The FHASecure plan is designed to allow families with strong credit histories who had been making on-time mortgage payments before their Adjustable Rate Mortgage reset-but are now in default-to qualify for refinancing.

FHA has recently experienced a substantial increase in the number of conventional borrowers refinancing into FHA products. With FHASecure, it can help even more. The number of these refinancing transactions has tripled since the start of 2006. FHA's transactions are projected to surpass 100,000 loans by the end of the fiscal year. To date, these figures do not include refinances for delinquent borrowers.

The FHASecure initiative will operate under the same safe guidelines as the FHA's existing mortgage insurance program without affecting FHA's financial health. Eligible homeowners will be required to meet strict underwriting guidelines and pay a mortgage insurance premium, which offsets the risk to FHA's insurance fund at no cost to the taxpayer.

FHASecure, like all FHA products, will be underwritten to ensure the borrowers have the ability to repay the loan, will require escrow for taxes and insurance, and will continue to offer unprecedented foreclosure prevention assistance. The FHA has never permitted and will not include pre-payment penalties or teaser rates that are common in exotic mortgages and have caused much of the current market troubles.

To qualify for FHASecure, eligible homeowners must meet the following five criteria:

1. A history of on-time mortgage payments before the borrower's teaser rates expired and loans reset;
2. Interest rates must have or will reset between June 2005 and December 2009;
3. Three percent cash or equity in the home;
4. A sustained history of employment; and
5. Sufficient income to make the mortgage payment.

"FHASecure is designed for families who are good borrowers but were steered into high-cost loans with teaser rates," said Assistant Secretary for Housing-FHA Commissioner Brian Montgomery. "These homeowners, many of whom are minorities, need a safe, affordable mortgage product that will help build wealth. All FHA borrowers pay mortgage insurance premiums to offset claims to the FHA insurance fund and ultimately prevent risk to the taxpayer."

FHASecure will also bring much-needed liquidity to the mortgage market. FHA anticipates more lenders will offer FHA-insured loans, pool them, and securitize them with the Government National Mortgage Association (Ginnie Mae), which has the full faith and credit of the U.S. government. This guarantee makes Ginnie Mae's mortgage-backed securities the safest on the market and helps to channel greater capital into the housing market, benefiting U.S. homeowners.


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