What is an FHA loan? The quick answer is that an FHA loan that is backed by the FHA. VA and FHA mortgage insurance protects lenders against non-payment of a loan by the borrower. Although the terminology can be confusing, FHA loans, mortgages and insurances are all the same thing, insurance policies. The same is true of the VA equivalents. Here is a description of each.
FHA Mortgage Insurance
The Federal Housing Administration (FHA) offers protection to lenders in the event of borrowers defaulting on their repayments. The question “what is an FHA Loan” is therefore wrongly worded. The FHA does not offer mortgage loans – it insures lenders against nonpayment.
When you receive a mortgage insured by the FHA, you pay the lender the interest and principal as normal, and also pay the FHA a separate insurance payment. These insurance premiums are used to reimburse lenders in case you are unable to meet the repayments. Lenders can therefore offer mortgages to applicants that would normally be refused them.
VA Mortgages are likewise insured by the Department of Veteran Affairs. To qualify for such insured mortgages you must be either a former or serving member of the armed forces. You can also apply if you are the spouse of a serving or past member of the armed forces. Surviving spouses also qualify. VA mortgage insurances work in much the same way as FHA mortgage insurance policies.
Advantages of VA and FHA Mortgages
A mortgage lender will usually ask for a down payment of at least 20%. Many people find this difficult, particularly as real estate increases in price but income does not rise along with it. An FHA mortgage loan enables lenders to relax this requirement since the loan is insured against failure to maintain payments.
For the same reason, VA insurance enables many members of the armed forces to own their homes, particularly when they return to civilian life. Not just that, but the widows of those who die for their country can purchase a home for them and their children. Not only is a mortgage possible with a lower down payment, but interest rates also tend to be lower than for regular mortgages
Other Aspects of FHA and VA Insured Mortgages
There is a limit to the sum that can be borrowed. In the event of low down payments, this tends to restrict such mortgages. The 2013 limits have been announced to start at $271,050 for 1-unit homes, with a top maximum of $2,105,100.
They enable people to get a foot onto the housing ladder. Once they have their first home, it is possible to move upwards. By building equity, homeowners can raise the necessary down payments for higher priced homes.
FHA loans are insured – but only from the perspective of the lender. As the borrower, you are still responsible for making your payments each month. If you fail to do so, the lender will get paid but you will still owe the debt. So make sure that your repayments are comfortably affordable before signing.
What is an FHA Loan: Summary
An FHA loan is not a loan as such, but a form of insurance to mortgage lenders that they will get paid even if the borrower defaults. There is a limit to what can be borrowed, but FHA mortgage insurance enables people to purchase homes that they would otherwise have been denied. Interest rates can be low and the down payment is less than for regular mortgages.
VA loans are similar, but in this case the insurance is for past and present members of the armed forces and their spouses or widows/widowers. What is an FHA loan? It is a means for those with lower income and a low down payment to purchase their home. However, the mortgage loan must still be paid, and should be affordable.