What Every Homebuyer Must Know About FHA Loans
The Federal Housing Administration (FHA) is a government agency within the U.S. Department of Housing and Urban Development (HUD). FHA is not a lender. It provides an insurance fund that protects lenders against borrower loan defaults. Therefore, to obtain an FHA loan, a homebuyer must get their loan through an FHA-approved lender. The actual loan and mortgage for your home is actually with a commercial lender.
Not all FHA-approved lenders offer the same interest rates and costs, even for the same loan. Therefore, borrowers need to shop around with multiple lenders for the best total package for an FHA loan.
Here's some good news
- Perfect credit is not a requirement of FHA. The FHA does not dictate a minimum credit score. However, lenders can overlay their own requirements on top of what FHA requires. FHA provides leeway in underwriting for the lender by insuring the loan, but the final decision about the loan is in the lenders hands.
The lenders' underwriting of a loan is targeted at ensuring that the homebuyer "has the willingness and capability to repay the loan, but we do have flexibility beyond pure credit score to look at the borrower's financial situation," according to Vicki Bott, HUD deputy assistant secretary.
- The minimum down payment is 3.5% of the purchase price of the home. Borrowers can use their own savings for the down payment. But, they can also use other sources such as a gift from a family member.
- Closing costs may also be covered. FHA allows home sellers, builders, and lenders to pay some of the borrower's closing costs. However, lenders often charge a higher interest rate if they agree to pay closing costs.
Here are some cautions
- Homebuyers should get a Good Faith Estimate (GFE) of closing costs from the lender when shopping for their loan.
- Mortgage Insurance is a must. Two premiums are required on all FHA loans: first, an upfront premium of 2.25%, charged when the homebuyer gets the loan (but may be financed in the loan); and second, an annual premium of 0.55% paid monthly with the mortgage payment.
Many homebuyers feel this all sounds expensive. However, the alternative is potentially not qualifying for a loan at all. The borrower must compare total costs of the purchase with the equity that potentially is possible in the long haul along with careful shopping for the loan. Click here for more details.
Information courtesy of Huntsville AL Realtor Mike Manosky.