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Definition of FHA

FHA is an acronym that stands for Federal Housing Administration. The administration was founded by the United States Federal government in 1934.

The main purpose of FHA was to allow people with sufficient income to purchase a home without the need for a major down payment.

FHA Does Not Lend Directly to Borrowers

Many people work under the assumption that they will receive a loan directly from the FHA office. This is not true.

Instead, FHA provides rules about home loans. Lenders that are qualified to offer an FHA insured loan must follow all the rules set forth by FHA (some lenders will add their own mortgage overlays as well). This allows multiple lenders across the country to offer low down payment loans to qualified applicants.

FHA Insures the Mortgage Loans

When a lender offers a home loan according to the FHA guidelines, that loan is insured by the FHA. The insurance protects the lender in the event the borrower is not able to make all the payments and the home is foreclosed.

Source of FHA Insurance

In order for FHA to insure the loans, there must be a source of funds to pay to lenders in the event of a foreclosure. These funds come from Mortgage Insurance.

When a borrower is approved for an FHA mortgage, they are asked to pay an upfront mortgage insurance premium (UFMIP) as well as a monthly mortgage insurance premium. The current upfront amount is 1.75% of the loan amount. The upfront portion is typically financed into the overall mortgage amount to save borrowers from paying out of pocket.

The amount paid monthly is determined by the loan to value ratio.