The Federal Housing Administration (FHA), a wholly owned government corporation, was established under the National Housing Act of 1934 to improve housing standards and conditions. It's goal was to provide an adequate home financing system through insurance of mortgages, and to stabilize the mortgage market.

Thanks to the insurance products FHA helped to pioneer, such as the long term amortizing loan, the nation's home ownership rate has soared to an all time high of 66 percent as of the third quarter of 1997; well on the way towards the goal of 67.5% by the year 2000.

Today, FHA plays a critical role in financing for minority borrowers, first time home buyers, borrowers who have troubled credit history, and borrowers who have little money to put down on a home.

• In Fiscal Year 1997, 76 percent of FHA loans originated were first-time home buyers compared to 68.3 percent in Fiscal Year 1995 and 72.7 percent in Fiscal Year 1996.
• Loan origination's for minority home buyers are increasing. The result is 29% of new homeowners in the past three years.

• Many Single Family mortgage insurance programs have been streamlined. For instance, the Section 203(k) purchase and rehabilitation program has been greatly modified. Lenders, Realtors, and nonprofit organizations across the country have received training on how to make the Section 203(k) program work for them and ultimately for you, the consumer.
• FHA has undertaken a demonstration in the area of automated underwriting before beginning to design its own automated underwriting tool as automation saves time and it ensures a more uniform treatment of all applicants.
• In the area of Manufactured Housing, FHA has worked with the industry to ensure that all manufactured homes meet enhanced safety standards.
• Finally, FHA is using the Internet in its business processes. FHA lenders can now submit information concerning their insurance endorsements electronically to a secured world wide web site called the FHA Connection. FHA homeowners can also access information regarding mortgage insurance premium refunds on the HUD/FHA home page.

While interest rates are similar, credit guidelines are different. FHA allows for borrowers with less than perfect credit to receive the same interest rate as a borrower with unblemished credit.

Most applicants are inundated with a variety of terms describing mortgages that are available on the market. The most popular include, Fannie Mae, Freddie Mac, and FHA.

FHA was created by the Federal Government to provide affordable housing financing for qualified borrowers. FHA insures 100% of the loan, eliminating the lender's risk. The borrower pays an upfront insurance premium which is approximately 1.5% of the loan amount. This money can be financed directly in the loan amount. The borrower also pays a monthly premium of .5% of the loan amount divided by 12 months. FHA requires down payment of 3%. This money can be a gift. No reserves are required. Closing costs can be financed in the loan amount.

Borrowers must provide proof of sufficient income to show ability to pay the mortgage. FHA guidelines are more relaxed, such as; a bankruptcy that was discharged at least 2 years ago, the use of alternative credit (utilities, cable TV, auto or medical insurance premiums, child care, school tuition, furniture or appliance store accounts) in lieu of traditional credit, and higher debt to income ratios. FHA interest rates are extremely competitive with conventional rates.

Fannie Mae loans are conventional loans made at the risk of the lender without benefit of any government guarantee or government insurance. A conventional loan with an LTV (loan to value ratio) of greater than 80% requires primary mortgage insurance, which can be paid monthly. The borrower must have 5% of his/her own funds for the down payment and 2 months reserves on deposit. Closing costs must be paid by the borrower.

Requirements of a conventional loan applicant include excellent credit, job stability with sufficient income, a sizable down payment, and low debt to income ratios. Borrowers who meet Fannie Mae guidelines are rewarded with an interest rate only slightly lower than an FHA interest rate.

The FHA streamline refinance

If you currently have an FHA mortgage you are eligible for one of the simplest money saving refinances available today. The FHA "Streamline Refinance" allows existing FHA home loan borrowers to reduce their interest rate without having to jump through hoops.

FHA has permitted streamline refinances on insured mortgages since the early 1980's. The streamline refers only to the amount of documentation and underwriting that needs to be performed by the mortgage company, and does not mean that there are no costs involved in the transaction.

The basic requirements of a streamline refinance are:

• The mortgage to be refinanced must already be FHA insured.
• The mortgage to be refinanced must be current (not delinquent).
• The refinance results in a lowering of the borrower's monthly principal and interest payments. No cash may be taken out on mortgages refinanced using the streamline refinance process.

Companies may offer streamline refinances and include the closing costs into the new mortgage amount. This can only be done if there is sufficient equity in the property, as determined by an appraisal. Streamline refinances can also be done without appraisals, but the new loan amount cannot exceed what is currently owed, i.e., closing costs may not be added to the new mortgage with those costs either being paid in cash or through the premium rate as described above. Investment properties (properties in which the borrower does not reside in as his or her principal residence) may only be refinanced without an appraisal and, thus, closing costs may not be included in the new mortgage amount.