FHA Explanation

A Facebook user asks what an FHA loan is and whether or not it’s beneficial. Dave explains.

QUESTION: FHA stands for Federal Housing Administration. It is a division of HUD, or the Housing and Urban Development Department. It is a government-insured home mortgage, which means if you got foreclosed on and Countrywide had your mortgage, Countrywide would lose nothing. The government gives Countrywide a check for the entire amount they loaned. Then Countrywide gives the house to the government after a foreclosure and the government sells the house, which is called a HUD listing or a HUD foreclosure.

ANSWER: It is zero risk for a lender to make an FHA loan. The idea originally was to stimulate the housing market in a time following the Great Depression with programs like that, where the government would bring assurance and insurance to the banks to get them to lend. The FHA loan is a little bit more expensive on the interest rate side and somewhat more expensive on the fee side than a conventional mortgage, so I don’t recommend it.

The only time anyone takes out an FHA loan is because the lending guidelines are a little more lenient or, mainly, you need very little for a down payment. Most of the time, when someone takes out a loan like this, it’s because they were advised poorly or they don’t have any money, which means they shouldn’t be buying a house.

For that reason, I’m not a big fan of the FHA loan, and as a taxpayer I’m getting tired of supporting crap like this. The only benefit, or the only reason that people get a loan like this, is because you can get it with little or no money down.