FHA Loans and Features

FHA loans are one of the many housing schemes of the federal government. The federal housing administration or FHA, as popularly known, administers these loans and the criteria are quite different from those loans as disbursed by conventional banks or lending institutions. The department, which was formed in 1965, has to its credit many people friendly schemes, has added another feather to its cap by introducing the FHA loans scheme.

These loans work on the basic principle of making housing affordable for people with lower income or not too good credit history, who might find it difficult to avail loans at normal rates. The down payment is normally as low as three percent and interest rates are also half of the market rates. Unlike veterans' administration loans, these loans are normally disbursed by the department directly. This loan is very useful for first time buyers, but contrary to belief, is not restricted to first time purchases. Those who have had to experience credit issues or even bankruptcy issues can sometimes avail of these loans, to buy a home.

There are a few advantages of securing an FHA loan as against a conventional loan. While the credit qualifying criteria is normally lower for FHA loans, it also has a better and more convenient closing stage with lower closing costs associated with it. Also, the down payment required can be gifted by a relative, in case of a cash crunch. This is a very useful tool as sometimes, lower income groups find it difficult to manage the down payment amount. As pointed earlier, the lower interest rates that are associated with such loans are also a big advantage, as your monthly payments tend to be reduced that much.

There are a few disadvantages connected to FHA loans as compared with the normal housing loans. The margin for the loan amount that can be sanctioned is lower than normal loans. This is because these loans are specifically designed for lower income groups and hence the budgeted amount is also kept similarly low. Another disadvantage is the presence of an additional payment that is termed as mortgage insurance premium. This is because the chances of lower income groups defaulting on mortgage payments are high when compared to other groups, and hence and an insurance policy has to be taken by the mortgagee to cover any such risk associated with expected default payments. This premium has to paid by the mortgagee and is exempt from income tax.

Some of the documents that may be required while applying for such loans are income related documents, tax returns filing statements and proof of funds for down payment and closing costs. This is certainly a great way of encouraging even those with lower incomes to buy a house and thereby increase the standard of living across the country.

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