The Federal Housing Administration is one of the most important government organizations for the real estate market. By encouraging and supporting the purchase of homes, this office helps Americans find housing at affordable rates while creating stimulation for the real-estate market, a crucial part of the United States economy as a whole.
But, like many government organizations, there is a lot of misunderstanding about the FHA. With that in mind, we’d like to share with you some of the most important FHA facts that all homeowners should understand.
Equipped with this knowledge, you’ll be better prepared to find your next home!
FHA Facts that All Homeowners Should Know
The FHA Does Not Actually Loan Money, They Insure Loans
Perhaps the most misunderstood concept about the FHA is who actually makes the loan. If you know only one FHA fact, know this: they do not loan money directly to borrowers. Instead, the FHA provides insurance against default on a loan, giving lenders greater reassurance. An “FHA loan” is simply a loan provided by a lender that is insured or “guaranteed” by the FHA. If the borrower defaults on the loan, the FHA compensates the lender. This makes lenders far more willing to provide loans, but in order to receive the insurance, the lender must make sure the loan meets specifications set by the FHA.
Mortgage Insurance Pays for FHA Insurance
Just like your auto or boat insurance, it has to be paid for. There must be a source of funding to support the insurance, and while some of it may come from taxpayers through the federal government, a large portion comes from an Upfront Mortgage Insurance Premium (UMIP) and monthly insurance premiums. The upfront payment is usually about 1.75% of the loan total, however, this is usually added into the mortgage total to keep borrowers from having to pay it all upfront. (Which seems to contradict the “upfront” in a UMIP.) The monthly premium will depend on your loan-to-value ratio.
The FHA Provides Various Loan Types
If you seek a loan from the FHA, you will have some flexibility on the terms. Fixed loans that are supported by the FHA can be from 10 to 30 years, and borrowers also have the option of choosing an adjustable-rate mortgage. This is an important FHA fact because it gives you more options when searching for a loan.
FHA Loans are for Owner-Occupied Homes
The FHA is meant to stimulate the housing market and encourage homeownership. It’s not meant to help you make a business investment. For this reason, borrowers are not allowed to use FHA loans to purchase rental property or other investment properties, such as commercial buildings. While it may be possible to purchase multi-unit dwellings through the FHA, you must purchase a property that you will live in for a certain period.
FHA Often Supports Low-Credit Buyers
Because the FHA is intended to enhance homeownership, they often have options available the help low-credit buyers, working under the mindset the owning a home is one of the pillars of financial stability. Borrowers who are approved for FHA loans often have moderate or average credit scores, and people with low credit ratings can often qualify for an FHA loan, even when conventional loans are unavailable.
Two Years of Employment is Generally Required for Approval
While the FHA wants to encourage homeownership, borrowers still need to meet specific requirements. One of the requirements (which does have exceptions) is that borrowers need to demonstrate that they have had the same job or been in the same line of work for the past two years. This will need to be proven through W-2 forms and other documents, such as tax returns if you’re self-employed. This is not a unique requirement, however, as virtually all loans will require proof of income in some fashion.
3.5% Down Payments are Required
The FHA wants to maintain a level of reliability and consistency among borrowers, so one of the requirements they have created is a 3.5% down payment. This down payment must be paid up front, and the money needs to come from a documented source, such as a savings account, CD, or money market.
3.5% might seem like a small number, but it can add up to thousands of dollars on a home. An easy way to calculate in your head is $3,500 for every $100,000 worth of home value. So if you’re looking at a house worth, say, $200,000, the FHA will require a $7,000 down payment ($3,500 x 2). Looking at a $300,000 home? Be prepared with a down payment of $10,500.
Fortunately, the down payment can be a gift from a relative. The money will still need to be properly documented, but this allows borrowers to find resources that come from family members.
FHA Loans Can Be Used for Condos
You aren’t limited to purchasing a traditional single-family home with FHA loans. In fact, it is possible to use the FHA’s support to purchase a condo unit. While the entire condominium facility must be approved, this provides a strong opportunity for buyers to purchase a smaller, more manageable home. Condos can be used by anyone, but they are particularly popular among young professionals and retirees.
To be approved, the condo project will need to meet standards set by the Department of Housing and Urban Development, which oversees the FHA.
FHA Allows Cosigners
People often need support from their friends and family members to make large purchases, such as auto or home purchases. The FHA understands this issue and allows for cosigners on their loans. This may be needed if your income or credit scores are not high enough for you to qualify alone. The cosigner does not have to live in the home, which means a family member, such as an adult child, parent, or grandparent, can use their income or credit score to help another person get approved. Cosigning certainly has it’s risks and should not be done lightly, but this FHA fact can be the difference between loan rejection and approval.
Providing Guidance and Support Through Your Mortgage Process
Want to learn more about FHA and other available loan options? Contact San Diego Purchase Loans today and we’ll help you find the right program for your needs and homeownership goals!