ORCF: Why FHA? (2024)

FAQs

Why is the FHA needed? ›

FHA mortgage insurance protects lenders against losses. If a property owner defaults on their mortgage, we'll pay a claim to the lender for the unpaid principal balance. Because lenders take on less risk, they are able to offer more mortgages to homebuyers.

FHA loans are mortgages insured by the U.S. government's Federal Housing Administration. The insurance allows lenders to offer qualifying terms that are less strict than conventional mortgages. That means that homebuyers (particularly first-time buyers) can more easily qualify for a mortgage.

While FHA loans can be much more forgiving compared to other types of loans one of the reasons an FHA application is declined is due to high debt-to-income ratios. Most lenders ask the total amount of monthly credit obligations, including the mortgage, should be no higher than 43 percent of gross monthly income.

Some reasons a seller might refuse an FHA loan include misconceptions about longer closing times, stricter property requirements, or the belief that FHA borrowers are riskier.

Affordable Interest Rates

One of the biggest benefits of FHA loans is that the interest rate charged on the mortgage is the same no matter what your credit score is.

An FHA loan may be a better option if you have a lower credit score, a higher DTI ratio, or less money saved for a down payment. On the other hand, a conventional loan may work better if your finances are sound and you can qualify for favorable loan terms.

The three primary factors that can disqualify you from getting an FHA loan are a high debt-to-income ratio, poor credit, or lack of funds to cover the required down payment, monthly mortgage payments or closing costs.

Common issues appraisers look for in the exterior are damaged roofs, cracks in foundations and anything blocking access to the property. When it comes to the interior, they look for basic things like missing handrails or chipped and peeling paint that could indicate a lead hazard.

The FHA's three requirements are that a property must be safe, secure, and structurally sound to qualify for one of their loans. Properties cannot have adverse conditions that might imperil the homeowner, and must meet proper building codes. As a buyer, these standards protect you from buying an unsafe property.

More mortgage insurance paid: Because you are making a lower down payment, you will have to pay more private mortgage insurance (PMI) to make up the difference. With FHA loans, you also have to pay an upfront mortgage insurance fee.

What will cause an FHA loan to fail? ›

The overall structure of the property must be in good enough condition to keep its occupants safe. This means severe structural damage, leakage, dampness, decay or termite damage can cause the property to fail inspection. In such a case, repairs must be made in order for the FHA loan to move forward.

Reasons for an FHA Rejection

There are three popular reasons – bad credit, high debt-to-income ratio, and overall insufficient money to cover the down payment and closing costs of a home.

The FHA's primary function was to insure home mortgage loans made by banks and other private lenders, thereby encouraging them to make more loans to prospective home buyers.

History of the FHA

Congress enacted the National Housing Act of 1934 to help restructure the federal banking system. Its primary purpose was to improve housing standards and conditions, provide a method of mutual mortgage insurance, and reduce foreclosures on family home mortgages.

FHA loan benefits include low down payments, great interest rates, easier credit rules, and financing for 1-4 units. Read on to see if an FHA is for you.

Because FHA closing costs include the upfront MIP, an FHA loan can have average closing costs on the higher end of the typical 3% – 6% range. That doesn't diminish in any way the value of getting an FHA mortgage, with its low down payment, lower interest rates and flexible underwriting.