Common Misconceptions About FHA Loans

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What are some of the common misconceptions about FHA mortgages?

FHA-insured home loan programs are a popular alternative to conventional mortgage loans offered by Fannie Mae and Freddie Mac. Currently, about 30% of the new home buyers use one of the various loan programs offered by FHA lenders. For borrowers looking to buy a home with very little down payment, FHA has been the preferred choice since its existence.

A number of common misconceptions are widely prevalent among new home buyers regarding exact role of FHA and its loan insurance programs. To successfully get a FHA loan approval, it’s important that you thoroughly understand the FHA loan programs, process and requirements. Some of the biggest misconceptions commonly held by new FHA loan applicants are:

Myth #1: Everyone gets approved for a FHA loan

Believe me, not everyone is eligible for a FHA home loan. While FHA guidelines and requirements are a lot more flexible, and can accommodate a number of borrowers that do not meet the conventional underwriting standards, not everyone qualifies.

To be eligible for an FHA loan, the borrowers will be required to have sufficient down payment, proof of income and reasonable credit score. Additionally, the FHA-approved lenders may require much higher standards than the minimum FHA qualification requirements.

Typically, a home buyer will need a 3.5% down payment, a credit score above 620 and stable income that can be documented.

Myth # 2: FHA loans require no down payment

Since the financial crisis of 2008, it’s almost impossible to get a zero down payment loan from any source, except for the rural loans offered by USDA and the Veterans Administration (VA) loans.

FHA down payment requirements are quite minimal. A new home buyer can qualify with a 3.5% down payment. Though it’s not quite a “no money down” option, it’s the closest option to that.

The down payment requirements may be much higher if the credit score is lower than 620.

Myth # 3: FHA underwrites and funds the loans

Remember this: FHA does not lend money. It’s just an insurer of the home loans underwritten by its approved lenders based on its minimum lending guidelines.

FHA stands for Federal Housing Administration. It’s part of the U.S. Department of Housing and Urban Development (HUD). Its mandate is to provide affordable home financing alternatives for primary residence buyers through its loan insurance programs.

FHA sets the program guidelines its approved lenders must follow in order to qualify for its loan insurance. There are more than 30,000 FHA approved lenders that take loan applications from eligible buyers and provide funding upon meeting the lending standards stipulated under FHA guidelines.

If a borrower defaults on a loan, the lender will claim FHA insurance and the agency will fully reimburse the lender for any losses they incur.

Federally insured home loans such as those offered by FHA provide numerous advantages to new homebuyers and existing homeowners. While they are extremely accommodating and easier to qualify, not everyone who applies for them may qualify. A number of minimum requirements must be satisfied in order to become eligible.