As a professional real estate consultant who has been in the game for over seven years, I can say that the only thing consistent in the real estate and mortgage worlds is change. In 2010, after the burst of the housing bubble, real estate got a wakeup call – alongside lenders. Then, once more in 2014, real estate pros once again woke up to some new revelations when it came to FHA loans (and lending), thanks to Dodd-Frank. As I service clients from all around the world when it comes to their real estate needs, it’s important to stay up to date on the latest and greatest information for FHA loans, and to pass that along to consumers, like you.
What are FHA loans?
FHA stands for the Federal Housing Administration, a type of mortgage secured by HUD (U.S. Department of Housing and Urban Development). These government-backed loans were once seen as the optimum financing vehicle for first time homebuyers, but over the years, I have seen them become more relevant to nearly any buyer, in any situation. It is because of this federal backing that FHA lenders can offer buyers attractive rates, less complex qualification requirements and enhanced flexibility when it comes to payment options.
Of course, when it comes to an FHA loan, that isn’t all you need to know. There are five very important things to know about FHA loans.
#1: Minimum Credit Requirements Aren’t That Bad
In most markets, the minimum credit score required to be approved for FHA financing is 620. However, I have seen some lenders work with borrowers with credit scores as low as 580. But, if you are already thinking you are disqualified due to bad credit, don’t despair. Over the years, I have worked with many lenders who offer supplemental credit counseling programs, designed to take you from a lower credit score to a homebuyer in less than a year.
#2: Minimum Down Payments are the Lowest of Any Other Loan
The only lower down payment compared to FHA loans are those granted to qualified service members and Veterans using VA loan programs, yet not even those are all angels of the morning in comparison, due to higher funding fees.
The minimum down payment required on an FHA loan is 3.5 percent of the purchase price. For instance, if you were looking at a $200,000 home purchase, your minimum down payment would be $7,000 as compared to $20,000 using most conventional loan products currently available.
To make a great loan product even better, in markets like mine, some FHA lenders also offer offer down payment assistance programs, getting buyers into a home for as close to $0 down as possible.
#3: Closing Costs can Be Subsidized
In my experience, closing costs and pre-paid items range from three to four percent of a home purchase, separate from the down payment. However, FHA allows the seller, builder, realtor or lender to contribute to a portion of buyer closing costs, when needed to “get the deal done”. Many times, skilled agents will add in a closing cost subsidy to seller or builder contracts, assuring that buyers get the most bang for their buck, and lowering their out of pocket costs.
#4: You are Stuck with Mortgage Insurance
When I started my career in real estate, the general rule of thumb for FHA loans was that when the buyer paid 20 percent of the principal, they could wave goodbye to their mortgage insurance premiums. Today, this is no longer the case, mortgage insurance is required for the entire duration of the loan. Fees for this range from 1.75 percent of the loan upfront (or financed into the loan) to as much as 1.3 percent in monthly premiums. It’s important to budget for this when selecting a property, so you don’t bite off more than you can chew.
#5: You Can Get a Loan to Repair a Property
For buyers looking at fixer-uppers or foreclosure properties, FHA offers a 203(k) loan that works as a principal loan plus extra funds for rehabilitating a property. Borrowers can finance certain amounts (based on area) for nonstructural repairs to a property (think drywall, paint, cabinets, fixtures, etc.) In addition FHA will also allow up to $5,000 in escrow for required structural repairs – items required to bring the house up to FHA livability standards.
While FHA loans offer tremendous benefits to today’s buyers, they are not always the right product. Find a skilled real estate agent and ask them to refer you to a qualified lender who can compare and contrast loan products, fees and services to help you determine the right mortgage for you.
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