The Federal Housing Administration is one of the most important government institutions for the real estate and mortgage industry. This organization is involved in many different facets, but their most important and well-known task is supporting “FHA loans.”
While most people, even those who have never purchases a house, have heard of FHA loans, few people truly understand what they (really) are and how they (really) work. With that in mind, we’d like to provide a few FHA loan facts to give you a better understanding of this important mortgage product.
7 Important But Under-Appreciated Facts About FHA Loans
1. The FHA Does Not Loan the Money
The term “FHA loan” implies that the FHA is actually lending out money for the purchase of properties. This is not the case.
Instead, the FHA is actually providing insurance on the loan; insurance that protects the lender if the borrower is unable to repay. Sounds complicated? It’s really not.
Essentially, the FHA agrees to compensate the lender if the borrower is unable to make payments. However, they don’t agree to provide this financial support (generally referred to as “FHA mortgage insurance”) to any loan. Instead, the lender and the borrower need to meet specific requirements to ensure the loan has the support of the FHA.
To get this support, the lender needs to verify that the borrower meets guidelines for credit, debt-ratios, and other factors. The lender benefits if the loan is supported by the FHA, as the risk is essentially taken off their shoulders. The borrower benefits because a useful loan option is available, increasing their chances of loan approval.
2. Not All Lenders can Service FHA Loans
It’s commonly assumed that a qualified borrower can walk into any lending office and take out an FHA loan through that lender or lending agent. This is not the case, as the agent needs to be approved through the FHA in order to provide these loans.
To become an FHA-approved lender, someone must complete specific training and education, then complete an online application and be approved as one of four different types of lenders: nonsupervised, supervised, government mortgagee, and investing mortgagee. Each one has different specifications, but as a borrower all you need to know is that not all lenders can offer FHA loans, so if you want to use this mortgage option, you’ll need to check if it’s provided.
3. There is No Set Interest Rate for FHA Loans
Each FHA loan has a different interest rate based on a variety of factors. Basically, the FHA is not lending the money, so they do not dictate the interest rate. Instead, because individual lenders are lending the money, the rate is essentially dictated by the competitive market; some can offer lower interest rates than others.
Each lender will have different rates available, but the borrower’s personal situation will also make a difference. If you have a good credit score, a low debt load, and are taking out a reasonable amount, you will be far more likely to get a better interest rate.
4. FHA Loans Have Low-Downpayment Requirements
Many people assume that if you are going to purchase a home, you will need about 20% for a downpayment. This is obviously a massive amount; for a $300,000 home, this would equal $60,000! However, the FHA gives borrowers the chance to secure a home with as little as 3.5% down on the purchase. This means that the same $300,000 purchase would only require $10,500 for a downpayment. This makes homeownership more affordable and attainable for a large group of buyers.
5. They Often Have Lower Closing Costs
In addition to downpayments, you will also need to pay for closing costs on your loan. With an FHA loan, however, you may have the option to have your closing costs completely covered by the home seller or even the lender. Closing costs can include the appraisal, title expenses, credit reports, inspections, real-estate agent fees, and more. However, if the seller or lender is motivated to close the deal, the FHA allows them to pay for these costs.
This can make the purchase more attainable, although the cost could be worked into the loan total. (Essentially, you will pay for them later, but the upfront costs will be reduced.) Other loans may not allow this option.
6. There is a Low-Credit Option
The FHA-loan qualification basically works in a two-tiered system. The first tier, which allows for a 3.5% downpayment, is available to anyone with a credit score 580 or higher. But if you have a low credit score, between 500 and 579, you could use the second option. With the second option, you can secure an FHA loan, but you will need a 10% downpayment. This downpayment essentially makes up for the increased statistical risk that comes from making loans to low-credit borrowers.
10% can be a high amount, but if you have a low credit score this could be the best option available.
7. FHA Loans Can Help with Needed Repairs
If you find a home that seems like a perfect fit for you and your family, but the property needs a few updates, updates which you can’t afford out of pocket, the FHA supports a loan product called FHA 203(k). Basically, with this program you can borrow the money you need for your home purchase and also borrow the amount needed for repairs. This allows you to have your home purchase and repairs encompassed in one loan (and one monthly payment), making it easier to stay organized and on budget.
With FHA 203(k), you can add up to $35,000 on your loan to update the property.
FHA Loans to Jumbo Loans, You’ll Find What You Need with Us!
Now that you understand some of the most important FHA loan facts, you are a more informed borrower. If you want more information on FHA loans or qualification, contact our staff today. Whether you want a small loan for a modest house or a jumbo loan for a luxury mansion, we are here to help with all your mortgage needs!
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