What is an FHA Loan?
During the Great Depression of the 1930s mortgage defaults and foreclosures were happening at a steady clip. In response the government created federally insured loans that gave mortgage lenders a safeguard by reducing their risk and stimulated home sales followed.
FHA loans must meet credit score and down payment requirements and also show proof of employment and income. FHA allows for a down payment as low as 3.5%. The way the loan program works is FHA collects a one-time, up front mortgage insurance premium (UFMIP) and annual insurance premium, also referred to as the periodic or monthly MIP, which is collected in monthly installments to insure the loan that the financial institution has issued to the borrower. If the borrower were to default on the loan payments the lender’s financial risk is reduced because the FHA steps in to cover the payments.
When is it good to get an FHA Loan?
FHA loans can be an attractive option for borrowers with a poor credit history – even those who have experienced bankruptcy or foreclosure. You must be out of bankruptcy for at least 2 years and not have had a foreclosure within the past 3 years. In addition, you must be current on all federal student loans and income taxes.