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Are FHA Loans a Government Loan?

Recent increases in subprime home foreclosures have seen many turning to FHA home loans. The Federal Housing Administration was created in 1934 as an effort to bolster homes sales during the Depression. By financially guaranteeing loans the FHA lifts much of the risk of non-payment and foreclosure from private lenders. It is important to remember that the FHA is not a lender; they just guarantee your loan.

Advantages to FHA Loans:

Bankruptcy not an automatic disqualification. In an effort to afford more people the opportunity to use this type of loan bankruptcy is not a disqualifier. The bankruptcy must be two years old and you must have good credit since then.

Less stringent credit requirements. Instead of looking solely at your credit report the Federal Housing Administration looks at what they call the "total scorecard". The total scorecard allows the FHA to better assess and manage the risk of a given loan.

Lower interest rates. Normal subprime lenders have employed much higher interest rates in order to compensate for the increased risk of the loan. Because FHA loans are guaranteed, there is substantially less risk for the lender and therefore interest rates are lower.

Down payment is required. While many might see this as a disadvantage, making it harder to afford a home, it is also an opportunity. Because a down payment is required the principle on the loan is less. This means there is less interest charged along the life of the loan. Together these both mean that the loan will be paid off that much quicker.

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