An FHA (Federal Housing Authority) backed loan is often confused with a lender’s mortgage by most buyers that see or hear about FHA Loans. So for starters as a buyer you should understand that the loan itself does not come from FHA. Instead FHA provides insurance or backing to the lender to provide a better opportunity for someone like a college student, a young couple just starting out, or any other person that may not have as much money as needed to cover a down payment on a conventional loan home purchase they plan to reside in. The way this backing works is FHA guarantees a portion of coverage of the down payment for the buyer so they have less out of pocket cost to get into a home. Basically if you got a LTV (Loan to Value) of 80/20 this would mean that 20% of the selling price of the house you wish to buy would be your portion of the down-payment to buy the house and 80% of the selling price would be paid by the mortgage holding a note for your monthly mortgage payment. What that means is your down-payment on a $100,000 home would be $20,000! Not many people have this kind of money just laying around so FHA comes into play and will insure all but 3.5% of the down-payment reducing the buyer’s down-payment to $3,500 on a $100,000 home purchase. Most people although excited about this great opportunity, rarely realize that they do have to pay something to take advantage of this program. If you utilize the program you will be charged an upfront portion of a premium mortgage insurance while at your closing as well as have a monthly premium to pay as a part of your monthly mortgage note for the entire term of your loan. Hence, in most cases an FHA monthly mortgage payment is usually a little higher than a non-FHA conventional loan with the same LTV. In many cases buyers will speak with friends and associates before buying a home and become frustrated when they learn the difference in a friends note and the one they have not realizing that there are a lot of factors that make a monthly mortgage note on the same priced property vary from loan to loan of different individuals. FHA backed loans is one of those variables so it is best not to compare your mortgage payment with someone else’s to decipher if you got a good deal or not. In other words, if you must use an FHA backed loan process don’t decide if you can afford to buy a house based on the note of one of your friends or associates. Often times the use of an FHA loan can be employed for a period of time until reaching a certain amount of owned equity in a property you buy. For example using the scenario of a home selling for $100K, when reaching an owned amount of equity of 22% some buyers refinance the loan and switch to a conventional loan to eliminate some of the monthly mortgage note expenses such as PMI payments. Remember with FHA backed loans the premium remains for the duration of the loan. Refinancing at this point is often possible because now with at least 20% of the original down-payment invested a lender can provide better lending options. Keep in mind that while a refinance may not cost you a down-payment you may still have to pay some of the processing expenses involved in acquiring a new loan.
Now that you understand what an FHA backed loan is there is another factor that you as a buyer need to be aware of. While you may qualify for an FHA backed loan the house you wish to purchase may not! This can at times frustrate buyers that are willing to purchase a “fixer upper” to get a better price for a larger sized house. What many do not realize is there is a slightly different type of appraisal required of FHA purchased properties. Basically FHA requires that the property being purchased “must be free of all known hazards and adverse conditions that may affect the health and safety of the occupants.” This means that the appraiser has quite a few extra things to inspect for the home to meet the FHA appraisal requirements. For example, proper drainage around the perimeter of the home is required, adequate water pressure and testing of both hot and cold water are required, the water heater must be in working order and up to local code, the attic must have vents, no damage, no exposed or frayed wires, no signs of water penetration or leaks, the house must have adequate insulation, the crawlspaces must have no signs of standing water or foundation issues, and these are just a few that must be adequate for the house to qualify for FHA backing. So basically not only does the buyer have to qualify for the FHA loan but so does the house!
In summary FHA backing is a great buyer’s loan program since it often allows a lender to give a buyer lower interest than that of a non-backed conventional loan in most cases. Credit scores are generally still acceptable around 580 for approval if backed by FHA. FHA backed loans are usually helpful for people with very little or almost no credit, in that it usually only requires two forms of credit history and in many cases will allow other forms of provable credit transactions to be used. Hopefully this article has given both first time buyers and established homeowner’s a better understanding of what is involved with using an FHA backed loan to provide an informed decision. Still need help with your home purchase process? Just call or email me with your questions and I will be glad to help with more guidance and assistance of your FHA home purchase. — “CLICK HERE” for more information on qualifying to use the FHA program.