What is an FHA loan?
An FHA loan is a mortgage which is guaranteed by Federal Housing Administration (FHA). The FHA loans are usually less strict compared to the conventional loans hence they are popular among the first time homebuyer.
How do FHA loans work?
The FHA loans are similar to most other mortgages with the only difference being that they are guaranteed by the federal government. However, this does not imply that the government simply gives the money to the borrowers.
The FHA loans are highly offered by individual lenders who can provide such loans to borrowers with low credit profile and more debt, since they are certain that the government will secure them a portion of their investment in an event of default.
The FHA loans are of a number of types such as:
- Basic home mortgage loan or 203(b) loan: This is the FHA 203(b) loan which is the primary program of the FHA to purchase a home or to refinance.
- Rehabilitation mortgage or 203(k) loan: A 203(k) loan of the FHA is used to pay the purchase price of a home and repairs. Such FHA construction loan would be in the form of Standard and Limited type, which has a wider range of renovation and various loan limits. These mortgages suit the customer of a fixer-upper.
- Disaster victim mortgage loan or 203(h) loan: In case you lost your home to a presidential designated disaster, and you need to re-establish or purchase new house, the FHA 203 h loan may be the way to do it with no down payment.
- Energy efficient mortgage (EEM): This is a mortgage that is available to purchase a home that is energy efficient or to renovate an already existing home to a more energy efficient one. These improvements may involve insulation, solar panels or energy saving appliances.
- Graduated payment mortgage or 245(a) loan: It is a rare form of mortgage where the amounts paid decrease at the beginning and as the mortgage payments gradually rise. They are mostly utilized by people who tend to increase their income in the future.