FHA Loans are assumable which means they can be easily transferred to another person without penalty, saving thousands of dollars in closing costs. A non-assumable loan require the owner to pay-off the mortgage upon sale and the new owner get their own mortgage. Although FHA loans are assumable, the buyer is still required to quality.
Conforming loans are ones that conform to GSE (Fannie Mae and Freddie Mac) loan requirements. The primary requirements are loan size, loan-to-value ratio, and down payment size. If you cannot qualify for a conforming loan due to insufficient down-payment or other reasons, you may qualify for an FHA insured loan. Learn more about the difference between FHA loans and conforming loans
This is the value of an asset you own. As you pay off your mortgage you build equity in your home. In an HECM reverse mortgage, you can trade equity in your home for cash.
Fair Market Rent
Fair market rent (FMR) is the cost of rent in a given area for a certain size home. FMR rates are determined by the HUD each year and are the rate used to determine payment amounts for federal housing assistance programs like section 8. Find Fair market rent rates in your area.
FHA
FHA stands for Federal Housing Administration. The FHA is an agency under the HUD, and is designed to help Americans (particularly low-income families) achieve homeownership.
FHA Loan
FHA loans are federally insured mortgages that are easier to qualify for than traditional loans. FHA loans are ideal for first time homebuyers, low-income families, and anyone who has faced bankruptcy or foreclosure in the past. Learn more about FHA loans.
Foreclosure
Foreclosure is when you are unable to pay your mortgage and the bank repossesses the home in order to recuperate their investment.
Forward Mortgage
A forward mortgage is a traditional mortgage scheme where a homebuyer takes a loan to pay a home and pays that loan off, typically over a period of 15 to 30 years. While paying off the mortgage, the home-owners is building equity in their home. The opposite is a reverse mortgage, where a homeowner sells equity in their home back to the bank in exchange for cash.
Government-Sponsored Enterprise
Government-sponsored enterprises are corporations created by the US government to provide increased credit liquidity to large sectors of the economy like agriculture, home finance, and education. The most well-known GSEs are Fannie Mae and Freddie Mac. Those organizations buy conforming loans from lenders in order to provide stability to the housing market.
Home Equity Conversion Mortgages (HECM)
Home Equity Conversion Mortgages (HECM) are federally insured reverse mortgages. HECM loans let senior homeowners sell equity in their home to banks for cash. The FHA insures those loans and offers very agreeable terms to homeowners. HECM mortgages are safer than traditional reverse mortgages but can be risky. Learn more about HECM Reverse Mortgages.
Housing Quality Standards
Housing Quality Standards (HQS) are established by the HUD and are used as minimum livability requirements for homes the FHA will insure. To meet HQS requirements, the property must have bathrooms, a kitchen, adequate heating and air conditioning, water, electricity, no lead paint, etc.
HUD
The U.S. Department of Housing and Urban Development (HUD) is a federal department designed to create strong, sustainable, quality, and affordable homes for all. The Federal Housing Administration is an agency within the HUD.
Inspector
An inspector informs the home owner if the home is safe and in good shape. An inspector can tell you if a home requires major repairs or will require them in the near future. The FHA strongly encourages home buyers to get a home inspection, but it is not required. The FHA only require an FHA approved appraiser looks at the property. An appraisal is for the lender, but an inspection is for the home-buyer.
Jumbo Loan
Jumbo loans are loans for homes that cost more than the conforming loan limit. Jumbo loans are for expensive homes. They require large down-payments, good credit history, and proof of enough income to make payments.
Lender
Lenders are the banks who offer financing for homes. The FHA is not a lender. Rather, the FHA only insures FHA mortgages. You still need a private bank to finance the mortgage.
Living Unit
A living unit is the space where one family lives. For FHA homes, a living unit is one- or two-bedrooms. FHA Loans can be used for properties with 1 to 4 living units as long as one of the units is occupied by the owner.
Loan Limit
FHA loans can only be used for homes below the FHA loan limit. You can find loan limits in your area here.
Loan-to-value Ratio (LTV)
The loan-to-value ratio is the measure of the value of a mortgage compared to the value of the asset being purchased. For instance, if you are buying a home worth $200,000 and you take a $180,000 mortgage after a $20,000 down-payment then the LTV is $180,000/$200,000, or 90%. The higher the LTV, the riskier the loan for the lender.
MIP
When you have an FHA Loan, Monthly Insurance Premium (MIP) is the amount paid to the FHA each month on top of your mortgage payment (interest and principle).
Multi-Family Home
Multi-family homes properties with multiple living units and are usually called duplexes, triplexes or quadplexes.
Non-Recourse Loan
A non-recourse loan is a loan secured by collateral. If the borrower does not pay, the lender can seize the collateral property, but cannot go after any of the borrowers other assets, even if the value of the collateral does not fully cover the default amount. HECM Reverse Mortgages are non-recourse.
Owner-Occupied
FHA loans must be owner-occupied, which means after purchase, the borrower must live in the home as their primary residence. This prevents FHA loans from being used for real estate investment.
Private Mortgage Insurance (PMI)
Private Mortgage Insurance (PMI) is similar to FHA Mortgage Insurance but is administered by a private company. The FHA is a federal agency and therefore is not in the business to make money. As a result, FHA loans are generally better than Private Mortgage Insurance.
Pre-Approval
Pre-Approval is a more involved process than pre-qualifying. Pre-approval requires a formal mortgage application a provide the lender with all documents to perform extensive background and credit checks. If you pass the satisfy all the lenders requirements, you will then be pre-approved. The next step is loan commitment. See how to get pre-approved for an FHA Loan.
Pre-Qualify
Pre-Qualifying happens before pre-approval. To get pre-qualified, you only have to give the lender a picture of your financial situation. There is no verification or checking in this step. After pre-qualifying, the lender will give you an idea of the amount of loan you can qualify for and approximately what your interest rate will be. The next step after pre-qualifying is pre-approval.
Refinance
Refinancing is when you finance something again, typically at a lower interest rate. Essentially you take a new mortgage with lower rate and use that money to pay off your old mortgage with a worse rate. This saves you from paying higher interest rates. But you do have to pay expensive closing costs to get a new mortgage.
Reverse Mortgage
A reverse mortgage is when a home owner sells equity in their home back to the bank for money now. See HECM Reverse Mortgages for more details.
Section 8
Section 8 is the short-hand name for the the Housing Choice Voucher Program. This is a federal program that helps low-income families afford rent or mortgage payments.
FHA Loan Terminology