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FHA Loans: What Are They?

By: Jessica Horn Click author's name for more of his/her articles

Choosing the best home loan for your specific requirements is an extremely crucial choice. Making the wrong choice could cost you thousands of dollars over the life of your mortgage loan. One of the better programs out there is put out by the FHA. The Federal Housing Administration has been around for a long time and they have some pretty solid home loan programs that you can take advantage of. Be sure to keep FHA in mind as it can provide an superb program if you don't already have an FHA mortgage.

Need a quick explanation of FHA? The FHA itself does not actually write the home loans. If you want to obtain an FHA home loan, you will still be dealing with a traditional mortgage lender. You can get them from banks or loan companies.

The variation between traditional home loans and FHA home loans is that the Federal Housing Administration actually insures the mortgage broker in the case of borrower default. This insurance allows the mortgage lender to offer a more adaptable program that means you might be able to get a better loan. . FHA is backed by something called PMI (Private Loan Insurance). When banks require you to get private mortgage insurance, it is to prevent them from losing money on the mortgage in the event of default. Be careful - the biggest drawback to an FHA mortgage is that the PMI insurance is required, and built into the mortgage loan - resulting in slightly higher payments.. With a non-FHA home loan, PMI isn't necessarily required, but be beware - it is required as a part of an FHA mortgage loan.

With an FHA mortgage, the FHA is taking on all of the risk. If you default on the mortgage loan, the FHA will pay the bank the amount remaining on the mortgage loan. This takes the burden off of the banks and puts it elsewhere. Therefore, the banks are now willing to make more loans to people that they would not normally home loan to. Therefore, you might be able to qualify for an FHA mortgage even if you have failed to meet the requirements for other programs.

With FHA - you're only required to give a 3% down-payment. This allows for a lot more people to pursue the dream of house ownership without a large down payment. Many traditional mortgage lenders require a much higher percentage down, which eliminates a huge portion of the market.

No pre-payment-penalty is associated with an FHA loan. Be aware - there are still home loans (mostly from predatory loan originators) that involve substantial fines if paying off the home loan early. If you sell or refinance your mortgage loan, you won't have to worry about that with an FHA loan.

Be sure to check with your local mortgage broker to see if FHA is for you. Most importantly - only get a recommendation of a good mortgage lender from your Real estate agent, a friend, or family member, and NEVER shop for a mortgage broker in the phone book or from a classified ad.

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