An FHA loan is one that is backed or supported by the federal government. However, this is not the only distinction. FHA stands for Federal House Administration, and an FHA loan is put in place when a lender approved by the Federal House Administration provides the insurance required to cover a mortgage-based loan. As such, the FHA insures the loan at a rate of about 1% which is the Minimum Insurance Premium, and the FHA-approved lender covers the cost of the insurance, before providing the loan to the borrower.
The scheme was developed to assist borrowers who were not able to cover insurance premiums to access mortgage loans and was developed during the Great Depression of the 1930s. It has however evolved to cover different aspects of the housing and real estate markets and its also a competitive type of mortgage insurance financing, while still retaining it’s original objective of protecting both the underprivileged as well as the FHA-approved lenders who are providing the loan.
If you are interested in getting an FHA loan, the first and obvious step would be to find out which financial or credit institutions are approved by the Federal House Administration; this information is available from the FHA and federal finance databases. There are a diverse number of lending institutions that are FHA-approved, and so it would be wise to look through their various terms and conditions and see which best suit your needs.
The financial institution or firm that is approached for the loan then does an assessment of its prospective customer, including past debt history as well as current income in relation to the loan facility they are seeking. After this, the assessment puts together a repayment proposal that the prospective borrower examines.
The FHA loan traditionally offers mortgage loans and refinancing at interest rates than you will find elsewhere and is also able to cover credit worthy individuals who do not meet the usually stringent expectations of other non-FHA approved lenders. For instance, a blood relative will be allowed to co-sign for the loan even though they may not be living within the residence of the premises being mortgaged as a form of guarantor.
Accessibility is also insured with low initial deposits, with some FHA-approved loans enabling the home-buyer to deposit as low as 3.5% in the initial acquisition process.
Apart from being more easily accessible to people that cannot afford the usual mortgage financing, FHA loans also are adjustable in terms of their rates, particularly during periods of low market interest rates, thus passing on the benefits of lower interest to the borrower.
It also allows for a combined interest rate system on the loan, where for a certain period the borrower is paying back the loan against a fixed interest rate for about three to five years, and after which, the interest can follow market fluctuations. This is referred to as the Hybrid Adjustable Rate.
FHA loans are thus an important aspect of the mortgage financing industry, helping provide the less financially privileged with access to mortgage financing while also acting as a buffer to strictly commercial enterprises in the market place.