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Is an F.H.A. Loan For You?

The pros and cons of these government-insured loans

During the 1930’s, the government sought to restructure the housing market by undertaking a couple of economic solutions; one of which is the offering of Federal Housing Administration Loans – borrowings subsidized by the government. More than 70 years later, FHA Loans are still in high demand.

FHA loans are not offered by the FHA itself; rather, the FHA only insures these loans that are originated by private lenders. To qualify, the borrower should pass the debt to income ratio, credit score eligibility, and other risk measures. Typically, FHA borrowers are a riskier group… a target market that was largely accommodated during the subprime loan heyday. The FHA guarantees that these borrowers are able to repay their dues. In a New York Times interview, Meg Burns, FHA’s director of single-family program development, said, “… That’s kind of a shock to most people because we serve borrowers with riskier profiles,…” she said. “But we have pretty stringent underwriting standards. You have to have sufficient verifiable income and employment to make your mortgage payments.”

So how do these loans compare to other type loans?

First, these are relatively cheaper because they include an upfront insurance premium that is spread into the borrower’s monthly payments. Second, borrowers need not fret about the ups and downs of rates as all FHA loans have fixed rates. Third, it covers more segments of the population (especially African Americans) who are often turned down with their mortgage application because of poor credit scores. Finally, the fact that these are backed by the government, borrowers are guaranteed not to be at the losing end.

On the downside, FHA loans cannot cover a higher loan than conventional types. They can only insure loans up to $729,750 (which is acceptable since the riskiness of the borrower is much higher and its 3.5 percent down payment is already an industry low). Second, the time it needs to process the application is much longer than traditional loans.

Loans from the FHA protect the borrower from unexpected losses. But thankfully, the office has implemented measures to curb the high risk involved.

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