How does FHA Loan Work?

An FHA loan is just a kind of home mortgage loan bearing one major difference. It is insured by the federal government via the FHA or the Federal Housing Administration. This particular agency is a part of HUD or the Department of Housing and Urban Development. HUD sets all the rules and requirements for the FHA loan program.

It is known by its full name, that is, HUD 203(b) Mortgage Insurance Program, but is most commonly known as ‘FHA Loans’. This kind of loan provides many benefits to the borrower. The biggest one is the down payment. The ones who are qualified from this program are liable to put 3.5 percent of the purchase price or the appraisal value. Regular or conventional home loans usually require larger down payments, but not every time.

How Does It Work?

The ones who meet the minimum eligibility criteria of the program are liable to apply for an FHA loan via any mortgage lender that is approved to take part in the program. All major mortgage companies provide FHA products, local as well as state lenders provide this facility too. There is a list of the companies on the HUD website which provide this facility. When an individual applies for this program, they have to undergo a screening process just like they have to go through with any other kind of home loan. The lender has to review the individual’s employment and income status, credit scores, previous borrowing history, and debt to income ratios. They will also guarantee that the property will also meet the minimum guidelines of HUD. If both, the property as well as the individual meet the HUD criteria and the lender’s requirement, the loan is eventually finalized and the individual receives money needed to buy the property. The funding happens during the closing process just like a regular mortgage loan.

FHA loans provide funding to people who aren’t qualified for a regular mortgage loan because of a bad credit score or a bad borrowing history. As a matter of fact, it is simpler for such individuals to qualify for an FHA loan than a regular mortgage loan. Hence, this is the outcome of the insurance offered by the federal government. When the lenders approve the loan, they are also provided some protection against the default in the form of insurance. Lenders then reimburse for losses that happen when the individual fails to repay the loan. Hence, it is advisable for an individual to build an FHA loan strategy.