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HUD/FHA Overview

The U.S. Department of Housing and Urban Development (HUD) oversees the Federal Housing Administration (FHA).  The FHA’s mission is to increase homeownership by providing mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories.  FHA insures mortgages on single family and multifamily homes including condominiums, manufactured homes and hospitals. It is the largest insurer of mortgages in the world, insuring over 34 million properties since its inception in 1934.

 

FHA Mortgage Insurance

 

Mortgage loans that are backed by FHA insurance are frequently called “FHA Mortgages”.  However borrowers never deal with the FHA but with companies that offer mortgages.  The mortgage companies make sure the property complies with FHA requirements, and then make the mortgage loan knowing they can get FHA insurance to guarantee the mortgage.  Many mortgage companies resell the mortgage to investors that are attracted to the mortgage because it comes with the FHA insurance.  So if the borrower later defaults, the investors can recoup their losses by making a claim on the FHA insurance.  The result is investors have less risk and therefore they will accept a lower interest rate and a less qualified borrower.  The FHA insurance induces investors to make more loans thereby fulfilling HUD’s mission of bringing homeownership to more Americans.

 

FHA Insured Mortgages

 

Unlike conventional loans that adhere to strict underwriting guidelines, FHA-insured mortgages require as little as 3.5% of the purchase price in cash investment by the borrower. To help more borrowers qualify, the FHA allows more flexibility in calculating household income and payment ratios.  FHA loans also allow for a lower borrower credit score than conventional loans.  They also allow up to 3% seller concessions.  For these reasons, they have become one of the most desired loans available.

 

The cost of the FHA mortgage insurance is passed along to the homeowner and typically is included in the monthly payment. In most cases, the insurance cost to the homeowner will drop off after five years or once the remaining balance on the loan is 78 percent of the value of the property -whichever is longer.

 

FHA Funding

 

The FHA is the only government agency that operates entirely from its self-generated income and is set up to cost the taxpayers nothing. The proceeds from the mortgage insurance paid by the homeowners are captured in an account that is used to operate the program entirely. FHA provides a huge economic stimulation to the country in the form of home and community development, which trickles down to local communities in the form of jobs, building suppliers, tax bases, schools, and other forms of revenue.