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What is The FHA and How Do FHA Loans Work?

What is The FHA and How Do FHA Loans Work?

Before we tackle the question of FHA loans, we need to explore a few related topics. Understanding these loans requires that you know a bit more about the Federal Housing Administration, and how the agency’s loan programs work.

The FHA was first founded back in 1934, and since that time, has worked to help Americans purchase single-family homes. While the FHA was originally a standalone agency, it was eventually incorporated into the Department of Housing and Urban Development (better known as HUD). Today, the FHA is the world’s largest insurer of home mortgages, and has been instrumental in the purchase of almost 48 million properties since its inception.

Now, you might have caught onto something with the previous sentence. The FHA is the largest insurer of single-family home loans in the world. That word “insurer” is important. When most people talk about getting an FHA 203(b) loan, or taking part in any other lending program through the Federal Housing Administration, there’s the sense that the loan originates with the government.

Is the FHA a lender? No, it is not. The government only backs the loan by providing mortgage insurance in the form of a one-time, upfront and recurring, annual mortgage insurance premium (MIP).

So, who gives you an FHA loan to purchase that first home? You’ll be working with a conventional bank, credit union, or another financial organization. The FHA only guarantees the loan to the lender. That is the entire point of these types of loan programs – they reduce the level of risk that you represent to the lender, whether that’s due to a low credit score, or not having a large enough down payment.

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Uses for FHA 203b Loans

203(b) loans can be used for the initial purchase or refinance of a single-family home. New homes, existing homes, duplexes, triplexes, quadplexes, and mobile homes are also eligible. Borrowers who refinance their current mortgage with a FHA 203b loan typically do so to obtain a better interest rate, or to otherwise take advantage of improved terms. While some borrowers decide to take out a 203(b) loan in order to purchase a property and make repairs or renovations, in many cases, the FHA 203(k) loan is a better choice in this situation, though in some cases, a 203(b) loan with repair escrows may also be a good option.

More 203(b) Loan Information

While we’ve covered the basics of loan eligibility, how FHA loans work, and the uses for the 203(b) loan program, there’s still a lot more information you might want to know about the 203(b) loan program. This includes information about closing costs, as well as our handy 203(b) application and closing checklists.

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