The FHA or the Federal Housing Government is a government insurance company and operates under the United States Department of Housing and Urban Development (HUD) that finances mortgages and refinance loans of lenders. As part of the National Housing Act of 1934, its goals are:
1. Improve housing standards and conditions,
2. Provide an adequate home financing system through insurance of mortgage loans, and
3. Stabilize the mortgage market.
FHA does not offer or make loans, but guarantees or insures mortgage loans provided by private lenders.. Lenders must be FHA-approved in order for their mortgages to be eligible for FHA insurance. FHA-insured loans pose lesser risk on the part of the lenders and this is an advantage. FHA will assure the payment of the loan in the event that the borrower defaults on his loan. FHA can qualify potential borrowers whose credit has suffered because of foreclosure or bankruptcy.
So, if you are planning to buy a home, but do not have yet the money to buy one, FHA is big help. Buying a home is now affordable to moderate and low-income individuals or families with the help of FHA mortgage insurance programs. The processing costs of mortgage loans is lowered down to make this possible. To prevent borrowers from trying to get a home they can’t afford, debt ratios for each state have also been set.
In late December, the FHA was insuring 5.8 million single-family homes — a total of $750 billion in loans which is more than half a million of which were “seriously delinquent and heading toward foreclosure “as reported by The New York Times.
In response, the FHA changed rules for borrowers. One significant change is that the borrowers will have to pay more upfront to get a loan from 1.75% to 2.25% of the loan amount. As a result, if you are paying 1.75% on a $250,000 loan for your which is $4,375 before, you’ll be paying $5,625 now.
The loan defaults have created losses which caused the FHA’s reserves to go below the required level.