The Federal Housing Administration was created as an effort to bolster homes sales during the Depression. By financially guaranteeing loans, the FHA lifts much of the risk of non-payment and foreclosure from private lenders. It is important to remember that the FHA is not a lender; they just guarantee your loan.
Advantages to FHA Loans:
Bankruptcy not an automatic disqualification. In an effort to afford more people, the opportunity to use this type of loan bankruptcy is not a disqualifier. The bankruptcy must be two years old and you must have good credit since then. Less stringent credit requirements. Instead of looking solely at your credit report, the Federal Housing Administration looks at what they call the "total scorecard". The total scorecard allows the FHA to better assess and manage the risk of a given loan.
Lower interest rates. Normal subprime lenders have employed much higher interest rates in order to compensate for the increased risk of the loan. Because FHA loans are guaranteed, there is substantially less risk for the lender and therefore interest rates are lower.
Down payment is required. While many might see this as a disadvantage, making it harder to afford a home, it is also an opportunity. Because a down payment is required, the principle on the loan is less. This means there is less interest charged along the life of the loan. Together these both mean that the loan will be paid off that much quicker.
A FHA Loan is an excellent option for someone in an urban or rural environment who is considering purchasing a home and would like to make a low down payment. The FHA is fairly lenient with credit, though requirements may vary by state. You can apply even if you have no credit history if you can prove that you have met past financial obligations.
Things to remember about FHA loans:
Any past bankruptcy must be at least 2 years old and the applicant must have had good credit for at least 2 consecutive years following the bankruptcy.
Any history of foreclosure must be at least 3 years old and followed by at least 3 consecutive years of good credit.
You must have had a stable income for at least 3 years and proof that you have paid all your bills.
You must be able to make a 3% down payment, which is considerably lower than conventional loans.
There is a 2.25% closing cost, and monthly payments must be roughly 30% of your income.
You can assume a FHA loan from a seller or pass it on to a buyer.
Any cost associated with the title, including the title search and title insurance for the home.
There are also eligibility requirements for the home. Properties that are eligible for a FHA loan include single-family homes, 2-4 unit properties, condominiums, doublewide manufactured homes and modular homes. Ineligible homes include (but are not limited to) co-ops, boarding houses, commercial properties, hotels, and private clubs. A home is also ineligible if the seller acquired the house within the past 90 days. For any property over 10 acres, the loan will be based on the price of the house and the first 10 acres only. Additionally, the property must be used as a primary place of residence.
One type of FHA loan that has a couple of other specific guidelines is the 203(k) loan, which is used for buying and remodeling a home. The home must be at least 1-year-old and the rehabilitation of the property must cost less than $5,000.
If you meet the above requirements, you are well on your way to qualifying for a FHA home loan.
Fannie Mae is an investor. They buy the loans from the bank as soon as they are funded. Their "guidelines" are what the bank follows when underwriting your loan. In order for a loan to be able to sell in the secondary market, the loan must meet or exceed Fannie Mae's guidelines to do so. They are partially government aided and partially public responsibility. They are a financial investor, not a bank. They regulate the conforming loan market along with Freddie Mac.
The difference between Fannie Mae and FHA is FHA is a loan program that is guaranteed by our government. If you default on your loan and it goes to foreclosure, the bank uses the insurance the government provided on the loan to retain the remaining balance of what wasn't collected at auction when the county you live in sells it after taking possession.
Fannie Mae buys the interest rate on the Note in the secondary market while the original lender, not Fannie Mae, retains the servicing rights i.e. collect payments, refinances, and customer service issues.
Hope this helps
Residential Mortgage Closer for 7 years