Important Moments in the History of FHA Loan Requirements

Since the inception of the FHA loan, requirements have changed tremendously. The FHA loans were created by the federal government after the Great Depression, as a means of making sure more people had access to funding for homeownership. Since homeownership is an indicator of how well the United States economy is doing, this step was one of the first to pull us out of the depression and back into prosperous times.

FHA Loan Requirements: Down Payment

When the program was first launched, the government intended to cover the down payment for the home buyers. This was the best way to extend the dream of home ownership to as many people as possible. Today, a FHA loan requires a 3.5% down payment, still considerably less than a conventional loan. As the down payment amount can be gifted to the home buyers, it is possible to get the loan without having to come up with this amount completely out of pocket.

FHA Loan Requirements: Credit Score

At the start of the program, the FHA loan underwriting showed no clear FICO score requirement, so nearly anyone, regardless of credit history could get the loan approved. If there were a few missed payments or late payments on record, as long as the borrower’s had a good reason behind them, the loan was generally approved. Since 2006, a minimum FICO score of 620, with no more than two 30 day late payments within the last two years has become a requirement as a preventative measure toward foreclosure. Over the years when there was no FICO requirement, the number of foreclosures increased.

FHA Loan Requirements: Mortgage Insurance

Mortgage insurance is provided to protect the lender since the loan is particularly risky for most of them. The insurance is tacked on to the monthly payment. Initially the insurance payment was no more than .5% of the balance of the loan (annually, broken down into 12 monthly installments) but there has been an increase to .55% of the balance of the loan for the borrower’s who are putting less than 5% down. As the payments are made on the loan and the principle balance decreases, the amount of the mortgage insurance payment decreases as well. A portion of the mortgage insurance payment may also be required up front at closing.

Without the FHA loan program, there are many homeowners who would not have been able to purchase a home. Since a conventional loan typically requires a 20% down payment, the FHA loan enables many people who do not have access to this down payment the chance to become homeowners. It is important to remember that the FHA program is constantly changing as underwriters spot problems and provide solutions to them. Keeping up to date with the FHA program is a good way for real estate professionals to market to potential home buyers. Knowing the details of the program is essential because some changes could be made between the time the home owners make an offer on a home and sign the closing paperwork.

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