An FHA insured mortgage loan is provided by an FHA-approved lender and backed by Federal Housing Administration Mortgage Insurance. The U.S. Federal Housing Administration (FHA) is a government agency created by the National Housing Act of 1934. Since 1934, FHA / HUD has insured over 34 million single-family mortgage loans in the United States, plus nearly 50,000 multi-family project mortgage loans.
The FHA insured mortgage loan, commonly referred to simply as an FHA loan, is a type of federal assistance. The main idea it to help low-income individuals and families to be approved for a mortgage loan that enables them to become homeowners. The loan is provided not by the FHA but by a third-party lender, but the fact that the loan is insured by the FHA makes lenders more willing to lend to applicants that would otherwise be denied or that would be offered less desirable mortgage loans, e.g. very small mortgage loans and/or mortgage loans with a high interest rate. The FHA insurance protects the lender against default.
The typical recipient of an FHA insured mortgage loan today is someone who can not come up with a large enough down payment and/or do not qualify for private mortgage insurance (PMI).
Unless your creditworthiness is low, a lender will rarely require FHA mortgage insurance or private mortgage insurance (PMI) if you want to borrow 80% or less of the property’s market value.
A major difference between between private mortgage loan insurance and FHA mortgage loan insurance is that the cost of private insurance will be impacted by your credit score. If your credit score is lower than 620, you can expect to pay a lot for private mortgage insurance. If your credit score is below 575, you might find it difficult to even find a private company willing to provide you with mortgage insurance.
Getting a FHA insured mortgage loan
- The FHA does not lend money, they only provide mortgage loan insurance. You borrow the money from a third-party lender.
- Only lenders approved by the U.S. Department of Housing and Urban Development can approve FHA insured mortgage loans (FHA loans). It is a good idea to compare offers from several approved lenders before you make any decision. It is not up to any governmental agency to set the interest rates for FHA insured mortgage loans.
- Depending on your creditworthiness, the lender will either ask if you want FHA insurance or insist that you apply for FHA insurance. In the first case, FHA insurance can help you get a more beneficial loan. In the second case, obtaining FHA insurance is a requirement for you to be approved for the mortgage loan.
- The lender will assess your creditworthiness based on various factors, such as debt-to-income ratio, monthly income, and payment history for other debts. If your FICO score is less than 640, you can expect the interest rate to be pretty high even with FHA insurance.
- You may need a co-signer to be approved for an FHA insured mortgage loan. If you are a first-time home buyer, the rules for who can be a co-signer are a bit more relaxed than for other borrowers. For a first-time home buyer, even a non-occupant co-borrower can co-sign for the loan, and the co-signer doesn’t have to be a blood relative.
- FHA only insure mortgage loans for homes that fulfill certain minimum requirements.
- If you are a first-time home buyer, the FHA will allow you to put down as little as 3.5% and receive up to 6% towards closing costs. In reality, it can however be difficult to find an approved lender that will allow a seller to contribute more then 3% towards allowable closing costs.
- To obtain mortgage insurance form the FHA, the borrower must pay an upfront mortgage insurance premium (UFMIP). This premium is equal to 1.75% of the base loan amount. With most lenders, the borrower can finance this premium by increasing the loan a bit, provided that the money is paid directly from the lender to the FHA.
- In addition to the UFMIP, the borrower will pay an annual mortgage insurance premium. The premium is based on loan term and loan-to-value (LTV) ratio.
Mortgage insurance premiums for 2015
Max 15-year loan term, LTV up to and including 90 percent: 0.45% annually
Max 15-year loan term, LTV greater than 90 percent: 0.70% annually
More than 15-year loan term, LTV up to and including 95 percent: 0.80% annually
More than 15-year loan term, LTV greater than 95 percent: 0.85% annually.
- If the mortgage loan exceeds $625,000 it is subject to an mortgage insurance premium surcharge. Usually, the surcharge is 0.25 extra percentage points for loan terms of 15 years or less, and 0.20 extra percentage points for loan terms longer than that.
- For some FHA insured mortgage loans, the annual FHA mortgage insurance premium can self-cancel, but not for any loan mortgage loan where the starting LTV was greater than 90%. For loans where the starting LTV was 90% or less, annual mortgage insurance premiums must be paid for a minimum of 11 years, but can then self-cancel if the loan-to-value ratio goes down to 78% or less.
- If you get your principal down by making extra amortizations, the annual mortgage insurance premium will not self-cancel when the loan-to-mortgage ratio reaches 78%, but you can contact your lender and ask if they are willing to terminate the FHA insurance. For 30-year loans, the lender can not terminate the FHA insurance until you have made regular payments for 5 years.
The U.S. Department of Housing and Urban Development (HUD) is the ultimate insurer of FHA insured mortgage loans. If a lender forecloses on an FHA insured loan, the insurance policy will compensate the lender and HUD will take possession of the insured property. The next step is normally selling the property at a HUD auction.
About the Federal Housing Administration (FHA)
The FHA is not the same as the Federal Housing Finance Agency (FHFA). The FHFA is responsible for supervising certain government-sponsored enterprises.
The Federal Housing Administration (FHA) is a U.S. government agency created by the National Housing Act of 1934. Among other things, this agency runs the program for FHA insured mortgage loans. The FHA does not construct any houses or lend any money directly; the agency only works through loan insurance programs and similar aids, including interest rate subsidies programs and rent supplement programs.
The FHA was created as a reaction to the many foreclosures on single-family homes during the Great Depression. Since 1965, the parent department for the FHA is the U.S. Department of Housing and Urban Development (HUD).
In the 1960s and 1970s, the role of the FHA expanded to include several aid programs for renters. Two examples of important new legislation was the Civil Rights Act of 1968 and the Housing and Community Development Act (passed in 1974). In the 1980s, even middle-income households began receiving FHA rental subsidies thanks to the Housing and Community Development Act.
As the capital markets in the U.S. matured during the second half of the 20th century, the number of home mortgage loans insured by the FHA decreased, since other mortgage loans become more readily available, including so called subprime mortgage loans. By 2006, FHA insured mortgage loans made up less than 3% of the home mortgage loans in the nation, and a vocal minority in Congress began calling for the abolishment of the FHA.
The subprime crisis of the late 2000s brought this development to an abrupt halt, and the share of home purchases in the U.S. financed with FHA insured mortgage loans sky-rocketed from approximately 2% right before the crisis to over 33%. The type of high-risk borrowers that would previously have obtained mortgage loans on the subprime loan market were now turning to FHA approved lenders for their borrowing needs, which put the FHA at great financial risk. By 2012, the FHA’s capital reserve fund fell below the congressionally mandated minimum of 2%. Just two years earlier, it had been at 6%.
At the time of writing, approximately 5 million single-family mortgage loans are insured by the FHA, and about 13,000 mortgage loans for multi-family projects. Over 40% of new home mortgages in the U.S. are FHA insured.