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What is an FHA Loan? Is it right for you?

July 25, 2013


Since the Great Depression of the 1930s, the U.S. government’s Federal Housing Administration (FHA) has provided a form of mortgage insurance to back loans made to Americans who would not otherwise qualify for a home loan. Over the years, FHA-insured loans have allowed consumers all across the country to become homeowners. The program allows borrowers to become buyers with a low down payment, typically as low as 3.5 percent. Today, the program is under pressure and some worry that soon these loans may fall out of favor.

After the subprime loan crisis began in 2007 and subprime lenders left the market, FHA loansbecame the primary method for lower income homeowners to qualify for a mortgage loan. Overnight, the FHA’s share of the market skyrocketed from around 4 percent of all loans to over 15 percent of all new loans and 30 percent of new home purchase loans.

Many believed that this would put undue stress on the agency and lead to higher delinquencies and losses for the agency. A study released by the Federal Reserve Bank of New York and New York University in July 2012 estimated that 30 percent of the loans originated by the FHA between 2007 and 2009 would be delinquent within 5 years.

The FHA has maintained that it is loaning money to people who are more creditworthy than in the past. However, last month (April), the agency increased the mortgage insurance premiums it charges consumers who take out FHA loans. FHA mortgage insurance traditionally remained an expense for borrowers until the loan amount due fell below 80 percent of the total value of the property. Lenders call that calculation the Loan-to-Value or LTV ratio. Next month (June), the agency will make another change that will require FHA borrowers to pay mortgage insurance premiums for the life of the loan.

Some say this will add thousands of dollars to the price of a home for FHA borrowers. Others point to the fact that most people refinance into new loan products about every 7 years, which would allow FHA borrowers to refinance into a conventional loan and possibly avoid mortgage insurance premiums long before their home was paid off.

FHA insures loans written by FHA-approved lenders who set their own rates and fees, so the only way to know for sure if an FHA loan will meet your needs is to talk to a qualified lending professional. While these government-insured loans are going through some changes right now, they are still likely to serve the needs of many homeowners in the years ahead.


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