FHA in a Nutshell

Reviewed: February 22, 2014
By FinanceWeb

The Federal Housing Administration, FHA, has been promoting affordable financing since 1934. Contrary to popular belief, the FHA does not directly offer home loans; instead, the agency creates policies that encourage banks to lend more money at favorable terms. Since the banks take on greater risk, the FHA insures these mortgages and agrees to pay the bank if the borrower defaults.

Affordable FHA Loans Now Available

All FHA mortgage programs focus on owner-occupied principal residences. The federal agency does not handle investment properties or second homes. FHA loans help people to:

  • Buy or refinance approved homes
  • Fix up homes they own or plan to buy
  • Make energy improvements to homes they own or plan to buy
  • Get cash out of their home equity

Buying or Refinancing a Principal Residence

For years the FHA has placed first-time homebuyers into affordable housing through the 203(b) Mortgage Insurance program. A single applicant or joint buyers can get into a house or condo with as little as 3.5 percent for a down payment. Other mortgage programs typically require 10 to 20 percent down. FHA loans also come with less restrictive credit standards and the ability to roll closing costs into the principal balance. In exchange for these looser financing guidelines, borrowers must pay mortgage insurance premiums for the life of the loan. Premiums equal roughly $225 per month for a $200,000 home. The FHA 203(b) program can be used to purchase or refinance a house, condominium, mobile home or manufactured home.

Fixing a New or Existing Home

The 203(k) Rehab Mortgage Insurance program encourages people to improve their living conditions and add value to their homes. Through this program, owners and potential owners of fixer-uppers can combine a purchase mortgage and renovation mortgage into a single loan. Qualifying improvements include changes to the structure, appearance, plumbing, roofing, flooring or landscaping; removal of safety hazards; addition of accessibility features and upgrades for energy efficiency. This loan program applies to houses, condos, mobile homes and factory-built housing.

Making Energy Improvements

Similar to the FHA’s Rehab Mortgage Insurance program, the Energy Efficient Mortgage program lets homebuyers lump into their mortgage the cost of making energy improvements. Participants typically reduce their utility bills while amortizing energy efficient upgrades over the life of the home loan. This program is open to people buying new homes or refinancing existing homes.

Converting Equity into Cash

The FHA also backs the Home Equity Conversion Mortgage, which is a reverse mortgage program for seniors 62 and older. The bank makes monthly payments to the owner of an owner-occupied single-family residence or owner-occupied multi-family residence. When the owner stops living in the home or the property has been sold, the loan proceeds must be repaid. In the case of an elderly person who has passed away, the heirs may choose to sell the property to pay back the loan or settle the balance through other means. The owner does not need to have an FHA mortgage in order to take out a reverse mortgage.

Americans can take advantage of the FHA’s purchase, refinance, rehab or equity programs by contacting an approved lender. Through these four major programs, the FHA continues to promote the joy of homeownership.