Great Question – Let’s find out if an FHA loan is the right loan for you
Homeownership has been the ultimate dream for most people for generations. In markets with limited affordable housing options, however, that dream might seem out of reach for low-to-moderate income homebuyers who simply don’t have enough money saved up for a large down payment, but have stable incomes, a good credit history and the ability to afford a monthly home payment.
Since 1934, more than 30 million Americans have achieved the dream of homeownership through the Federal Housing Administration (FHA) loan, a program administered by the U.S. Department of Housing and Urban Development (HUD). So how do FHA loans work?
For starters, the government insures the loan, so lenders can offer potential homeowners a better deal. FHA loans typically have low down payments, reduced closing cost, and less stringent credit requirements than conventional (non government) loans.
First-time homebuyers, in particular, find that FHA loans, with a down payment as low as 3.5 percent of the purchase price, provides the leg-up they need to enter the housing market. Home buyers needing help with the down payment may be able to receive extra assistance from their state or local government programs, or use a gift from a relative or friend without penalty.
Borrowers using FHA loans typically need a credit score of 580 or higher to qualify for a lower down payment. People with credit scores between 500 and 579 can still obtain FHA loans but are required to make higher down payments of at least 10 percent (or more). Please note: all of these numbers are subject to change – check with your lender.
Minimum Property Guidelines for FHA Loans
According to the U.S. Department of Housing and Urban Development, the FHA requires that the properties financed with its loan meet their safety, security and soundness standards. This includes but is not limited to:
- Heating/Cooling Systems must be operational at the time of inspection and provide healthful and comfortable living conditions.
- Electrical system must be adequate to support the functions of the appliances, heating/cooling etc.
- Plumbing system – must be working properly with no signs of leaks or damage under fixtures and water heater has the right valves etc.
- Roofs must not have defects or signs of leaking.
The above are just some of the items an appraiser will report on when visiting the property. The FHA does not require cosmetic or minor defects repairs or deferred maintenance repairs as long as safety and security of the homeowner is not affected. The appraiser will submit a report with a list of repairs necessary in order for the mortgage to be approved. These repairs will need to be completed prior to the settlement date.
Mortgage Insurance Premiums
FHA loans require two types of mortgage insurance premiums: The upfront premium, which can be paid at closing or financed by the borrower in the mortgage payment, is 1.75 percent of the loan amount. FHA borrowers are also charged an annual premium that is paid monthly and varies based on the life of the loan, the initial loan-to-value ratio and the amount being borrowed. Ask your mortgage lender for a full explanation of these premiums.
FHA 203K Loan
The FHA also offers a special loan product for rehabilitation purchases called the FHA 203(k) loan, which rolls the extra cost of rehabbing a property into the mortgage while providing a set amount of cash to the buyer up front to make necessary improvements to an FHA-qualified property.
The FHA has borrowing caps in each state so it’s important for homebuyers using the program to determine how much they can afford and whether or not that amount falls above or below the loan cap rate for the area they wish to buy in.
Contact your lender for more information about the FHA loan requirements. If you’ve not selected a lender yet be sure to read my blog on “How to choose a lender“. And as always, feel free to contact me should you have questions or would like recommendations to some qualified lenders.
The author, Rick Sheppard, is a licensed real estate broker with RE/MAX Achievers, Inc in Pennsylvania and a 32+ year veteran of the real estate trenches. He knows a lot because he’s seen a lot. If you have any questions about this or any real estate related topic, feel free to contact Rick at [email protected] and he’ll do his best to answer your questions.