CH 17-3: FHA Loans

A measure of a borrower’s trustworthiness to repay a loan in full and on time based on their credit report, payment history, applicable income ratios, and other financial information.

Creditworthiness

The relationship of a borrower’s total monthly debt to gross monthly income, expressed as a percentage (Total Debt / Income = Ratio %). Debt obligations include housing and long-term debts with more than 10 payments remaining.

Debt-to-Income Ratio (DTI)

An agency of the federal government that oversees many federal housing programs.

Department of Housing and Urban Development (HUD)

A federal agency established in 1943 to increase homeownership by providing an insurance program to safeguard the lender against the risk of nonpayment. Currently part of HUD.

Federal Housing Administration (FHA)

The basic FHA-insured, fixed-rate, long-term financing program for the purchase of a one- to four-unit owner-occupied home.

FHA 203(b): One- to Four-Family Regular Loan

An FHA-insured loan intended for law enforcement officers, teachers, firefighters, and EMTs who are purchasing a single-family home in a revitalization area. It provides eligible buyers with a 50% discount off the list price of a HUD-owned single-family home, as long as the buyer agrees to occupy the home for at least three years as their primary residence.

FHA 203(g): Good Neighbor Next Door

An FHA-insured loan intended to help borrowers finance repairs, renovations, and improvements to a home.

FHA 203(k): Rehab Loan

A home financing option available to qualified borrowers through which the Federal Housing Administration insures approved lenders against loss from borrower default.

FHA-Insured Loan

The relationship of a borrower’s total monthly housing expense to gross monthly income, expressed as a percentage (Total Housing Expense / Income = Ratio %).

Housing Expense Ratio

The mandatory fee charged for FHA mortgage insurance coverage that protects lenders and the FHA in the event of a borrower defaulting on the loan.

Mortgage Insurance Premium (MIP)

A federal law enacted in 1934 to make housing and home loans more affordable. The act created the Federal Housing Administration (FHA).

National Housing Act

An insurance policy paid for by a borrower using conventional financing that protects a lender if the borrower defaults on their loan obligation; usually required when the loan-to-value ratio is greater than 80%.

Private Mortgage Insurance (PMI)

A one-time premium paid by the borrower at the time of closing for an FHA-insured loan. This premium protects the lender from potential losses that might occur if the borrower defaults on the loan.

Up-Front Mortgage Insurance Premium

TRUE or FALSE: The National Housing Act of 1934 created the FHA to aid in rebuilding the nation’s financial strength and help provide homes to those in need during the Great Depression.

TRUE: The FHA was established by the National Housing Act of 1934 and played a crucial role in helping the nation recover from the Great Depression by promoting homeownership and improving access to credit.

Which loan conditions did the FHA establish?

3% down, 30-year payment schedule

YES or NO: Does the FHA loan money directly to borrowers?

NO: The FHA does not lend money directly to borrowers. Its role is to provide mortgage insurance to lenders, promising to reimburse the lender in case of borrower default.

A high school chemistry teacher named Sara has been working hard to save up for her dream home, which is a HUD-owned home located in a revitalized area. She has finally saved enough money for a down payment and is ready to learn more about the options available to her for her first home purchase. As her real estate agent, which of the following FHA loan programs would you advise is most suitable for her situation?

FHA 203(g) Good Neighbor Next Door