Function

• FHA loans mitigate risk for the lender because the FHA agrees to back the loan, so if a borrower defaults, the lender will recoup its money. Besides this, private mortgage insurance is always required when the Loan To Value of the property (LTV) is greater than 80 percent. This insurance is another guarantee for the lender. FHA loan requirements and guidelines are usually considered more lenient than other types of conforming or conventional loan programs, because they look at the whole picture of the borrower, and rougher credit history is many times acceptable.
  
  

Features

• FHA requires a minimum of only 3 percent down on a home price and even offers down payment assistance, so a borrower may end up with 0 percent down payment. Loan limits allow a respectable loan amount aimed at the mid price-range for single family homes or for up to a four-unit property where the owner lives in one of the units. FHA will also loan on condos, double wide mobile homes and modular homes, where many other lenders may not. There are income limits that a borrower must stay under in order to qualify, which again reflect the average household income and may vary by state. There are no FHA loans for investment properties, but there are jumbo FHA loans available.
  
  

Significance

• A complete application must first be obtained by the loan officer representing the lender, and then the application information is run through a computer system for underwriting. The system analyzes credit, income and debt, looks at money in the bank or reserves, employment history and many more fields, and decisions are offered within minutes, along with what documents will be required to close and fund the loan. In some cases a denial may come up based on the information input, and sometimes it may be simply because the loan amount is a bit too high, whereas if resubmitted for a smaller loan amount, possibly as low as $1,000, or by adding in $500. from a savings account the applicant had forgotten about, an approval may possibly be given. Loan officers who are familiar with the computer underwriting system will often play around with the numbers until an approval is given, keeping in mind that whatever is on that application must be verified to the letter. A live underwriter will then review the automated decision and stipulate in the form of a pre-loan approval the documents that will be needed, including an appraisal to close the loan.
  
  

Benefits

• The FHA does want to make sure that any property it is willing to stand behind is in good condition. This is a true benefit for the buyer of the home. FHA inspections are more rigid than normal inspections. All the wiring, roofing, structure, insulation, plumbing, windows and doors are inspected, along with many more items. If the property is found unsatisfactory, the seller must comply and repair it. If not, the loan will not be given to the borrower for that property, and he will need to find another. The FHA wants to make sure that the borrower doesn't buy a bad property that will cause him hardship, and in the sad event that the property is ever foreclosed on, a solid property will be easier to auction off and sell. Another benefit to the borrower is FHA "Streamline" financing, wherein they may refinance very easily without much paperwork if interest rates go down and can even finance the closing costs.
  
  

Effects

• Historically FHA loans are more popular and aggressive in a slumped housing market and economy when sales are slow, values are declining and unemployment is high. FHA loans offer a real stimulus for housing purchases for the average family. Lenders who offer these loans may do very well at the same time as other loan programs tighten up guidelines.