FHA Home Loans Refinancing

The Truth Behind Subprime vs. FHA Loans

02.26.11

Chances are that if you have bad credit or lack the means to document your income, you will be considering FHA loans and sub-prime mortgages.  Just a few years ago, there was a sub-prime loan programs for almost every situation, but the foreclosure crisis settled in and most of the sub-prime 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 Sub-prime Lending?

One question many people have when looking into FHA home loans is how they compare to sub-prime mortgages. There are a few key differences, and knowing how the Federal Housing Administration’s practices differ from sub-prime 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 non-prime 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 sub-type of a sub-prime mortgage. However, while both FHA mortgages and non-prime 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 sub-prime 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 sub-prime 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 non-prime lending crisis in 2007, FHA loans are in fact one of the only ways to obtain non-prime lending, as many lending practices were cut off as a result of the housing bubble. A sub-prime mortgage can definitely help those who want a home afford one, but one of the only sub-prime loan techniques still in practice is the FHA approved loan, although it is certainly a safer practice.

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