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FHA mortgage loans are perhaps the most widely used form of home loans in the market place.
The Federal Housing Authority (FHA) is an agency created back in the 1930’s during the Great Depression - a period that had severely impaired the housing market, bringing home building as well as home mortgage lending to a stand still.
FHA is part of the Department of Housing and Urban Development – mostly common know as HUD.
FHA has to answer to Congress for many of its position in the market – including the limit of each individual loan that will be insured (Please see more below).
FHA Is An Insurance Organism NOT A Mortgage Loan Institution
It does not make loans directly, instead it is an insurance organism that aims to stimulate the housing sector at the same time it offers some level of security to mortgage lenders.
FHA primary role is to provide the private lenders insurance – and therefore bust the level of confidence in the market place – against the lenders losses in case of borrowers’ default.
Upon insuring the finance institutions in case of foreclosure, the FHA mortgage loans make them much more marketable papers and make banks as well as other institutions [like retirement funds] willing to trade them back and forth in the so called “secondary market” which means investor who do not make the loans however buy them after closing as an investment.
And, in the process, the loans become more affordable and easier to consumers like you and me to get mortgage loans.
FYI – it is very common that at the day of the closing, whoever originated the loan will already have sold it to somebody else.
Some homebuyers feel a bit disappointed: Don’t be!It is the “secondary market” working at full force. Now that lender has already cleared more funds to finance a home to another qualified buyer.
Investors see FHA mortgage loans as a safer investment compared with other financing deals like stocks and many of them have billions of dollars of their portfolio invested in them.More competition equals better terms and rates. Better terms and rates equal more people willing to buy homes and will be able to afford to do so.
Widely Used: Approximately 33% Of All Loans Made In The US
FHA mortgage loans enjoy an ever growing popularity
The reason for such popularity is that you can buy a home with as little as 3.5% of down payment.
Many home buyers do not have a large amount of money for their down payment …and do no want to wait until the do!
You can get into the home of your dreams with only 3.5% (Three and a half percent) of the purchase price.
However I like to caution that it ends up a rather costly loans because it will have an upfront fee of 1.5% of the amount finance AND then you need to pay 1.25% (again of the amount of the loan) a year – every year for mortgage insurance (MI), until you reach 80% (or below) of the amount of the loan or the loan to value.
Actually in a 30 years fix FHA will just relinquish that MI after you have paid 78% of the amount borrowed (or LTV)
However, in turn, you need to pay a fee to receive a FHA loan. It is called mortgage insurance. You will pay 1.5% upfront plus 1.25% a year until your mortgage payments.
Limit For A FHA Backed Loan
The limit for FHA mortgage loans will vary depending where the home is located.
Smaller cities tend to have lower ceiling and large metropolitan areas like New York City, San Francisco, Hawaii, the US Virgin Islands where real estate prices are historical pricier will see the higher amounts financed.
Even though FHA mortgage loans are available for homes priced below $50,000, it is erroneous to assume that they will only back purchase on the low end.
You might be surprised to know that they also back loans to purchase homes on the high end as well.
FHA takes in consideration the Metropolitan Statistical Areas (MSA) as well as the housing value of the county where the subject property is located.
Currently Congress has authorized maximum is $ 729,750 for any given home loan.
However this amount is available for MSAs where real estate prices have been historically high. Many other locations will have proportionally lower maximum amounts.
Consider that this is the “amount financed” so, if you were to add to it the “down payment amount” the total “purchase price” can be a bit higher.
First Time Buyer Bridge To Ownership
In the Atlanta MSA that amount ($ 729,750) can buy you an excellent home with a swimming pool and no less than a 3car garage, 4 or 5 bedrooms, a Jacuzzi in the master bedroom, modern kitchen with stain less steel appliances and a basement to die for…
However in NYC, Honolulu or San Francisco it quite possibly will not go that far.
I guess Congress has to cut it somewhere – and someone will be left out of the range…
Actually it is lots of good folks in these MSAs of high home priced that will be out of range even though we are talking about close to ¾ of a million dollars.
Nonetheless FHA mortgage loans will always be among the favorite home loans especially for first time buyers.
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JC Fagundes, Associate Broker
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