The Veridian Blog

FHA loans are guaranteed against default by the Federal Housing Administration as a way for lower income or low credit buyers to borrow money for the purchase of a home they would otherwise not be able to afford or qualify for.  The money does not actually come from the government, rather from private lenders who are approved as FHA lenders.  Because the loans are insured, the lender has a virtual zero-percent default risk and can hence offer very attractive rates, as long as the applicant fits FHA criteria. 

FHA guidelines allows homebuyers to put down as little as 3.5% and receive up to an additional 6% towards closing costs.  It also allows a co-signer for an applicant with little or no credit (minimum 640 FICO).  Lenders can also make loans on properties that may not have met conventional underwriting requirements, such as manufactured homes, multifamily properties and some health-related facilities.

The downside?  To obtain FHA mortgage insurance, an upfront mortgage insurance premium equal to 1.0% of the loan amount (recently lowered from 2.25%) is required and is normally financed by the lender and paid to FHA on the borrower's behalf.  Depending on the loan-to-value ratio, there is also likely a monthly premium ranging from 0.50 - 0.85%.  This premium is automatically eliminated once the LTV reaches 78%.

If your buyer fits the guidelines, FHA loans programs offer a fantastic opportunity to those applicants who couldn't otherwise qualify under conventional terms.  For more information, please see the FHA website at http://www.fhaoutreach.gov/FHAHandbook/prod/contents.asp?address=4155-1