Chances are that if you have bad credit or lack the means to document your income, you will be considering FHA loans and subprime mortgages. Just a few years ago, there was a subprime loan programs for almost every situation, but the foreclosure crisis settled in and most of the subprime lending vanished. Many consumers and lending professionals migrated towards the FHA loan programs for refinancing and home buying because FHA was not credit score driven like the traditional mortgages.
Have FHA Loan Programs Taken Over for Subprime Lending?
One question many people have when looking into FHA home loans is how they compare to subprime mortgages. There are a few key differences, and knowing how the Federal Housing Administration’s practices differ from subprime lending practices is important when you are considering buying a home. If you are looking into buying a home and do not have the starting capital necessary for a down payment or a standard private mortgage insurance plan, then knowing how the FHA stacks up against subprime loans is a good way to decide which is right for you. Here, we’ll go over some information on the FHA vs. subprime loans.
Many people believe that the FHA mortgage is a subtype of a subprime mortgage. However, while both FHA mortgages and subprime lending are designed to help those that could not normally afford a home get on the market for one (such as those with poor credit), there are important differences that should be considered. One of the key differences between FHA loans and standard subprime loans is that FHA loans are technically federally assisted. This means that, to some extent, the government will assist those that would have trouble paying off a standard mortgage from a private mortgage insurance company.
FHA insured loans are not given out by the government itself. Rather, the loans are given out by FHA approved lenders, which work with the Federal Housing Administration to provide a loan that the borrower can pay back. Getting mortgage insurance from the FHA involves an MIP, or mortgage insurance premium, being financed by the lender and paid to the FHA on behalf of the borrower. This MIP is equal to a percentage of the loan at closing. Some loans will have monthly premiums, depending on the nature of the loan and the ratio of the loan to the value of the home.
FHA home refinancing has expanded their suite of loan options significantly over the last 5 years. In an effort to make up for the lack of subprime loans in the market-place, FHA has introduced several mortgage relief initiatives in addition to the popular FHA streamline refinance program.
FHA mortgages are an excellent tool for those that are looking for a home but cannot afford one under normal circumstances. After the subprime lending crisis in 2007, FHA loans are in fact one of the only ways to obtain subprime lending, as many lending practices were cut off as a result of the housing bubble. A subprime mortgage can definitely help those who want a home afford one, but one of the only subprime loan techniques still in practice is the FHA approved loan, although it is certainly a safer practice.
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