Under the umbrella of the U.S. Department of Housing and Urban Development (HUD) the Federal Housing Administration (FHA) has been helping consumers purchase homes since 1934. Through the FHA, lenders are insured against loss and often offer loans with low down payments, less stringent credit requirements and low closing costs. There are still some things that a potential homeowner should understand about FHA loans.
Understanding reduced credit requirements
While the credit score requirements for new borrowers is often less stringent under FHA guidelines, there are still minimum credit scores that apply. Borrowers with a credit score of under 500 are typically ineligible for FHA loans. Borrowers who have credit scores above 580 may qualify for a down payment as low as 3.5 percent while those borrowers who have a credit score between 500 and 579 may be required to make a minimum down payment of 10 percent.
Negotiating closing costs
One of the most attractive features of FHA loans is that sellers, builders and lenders may offer to reduce the borrower’s out of pocket closing costs. Sellers may offer to pay part of the closing costs as an incentive to sell their home faster. Builders who are interested in moving new homes may be willing to pay part of the buyer’s closing costs and lenders may waive some closing costs. In the case of lenders offering to reduce closing costs, borrowers should consider getting multiple quotes because in many instances, lenders will charge a higher interest rate on the loan in return for reducing some costs.
Mortgage insurance premiums
Many FHA borrowers are surprised to learn they will have to pay private mortgage insurance for the life of their loan. This is different than most traditional loans where these premiums are paid only until the borrower has 20 percent equity in the home. FHA charges the borrower twice; first at the time of closing borrowers will pay a one-time premium of 1.75 percent of the loan and then the borrower will pay between .45 and .85 percent monthly for the life of the loan depending on the mortgage term. These costs can add up and borrowers should review these costs with the lender and compare them to non-FHA loans before accepting a mortgage.
Special loans for special needs
Whether a home is relatively new or was built decades ago, the home may need repairs. The FHA does offer 203(k) loans of up to $35,000 for non-structural repairs like new cabinets, fresh paint or even new plumbing fixtures. This can be very helpful if a new homeowner is looking at a fixer-upper. Borrowers should discuss this option with their loan officer or mortgage broker since the 203(k) loan can be combined with a standard home purchase mortgage.
FHA loans are fully insured which means a lender is more likely to be willing to take risks they may not otherwise take. Borrowers should also be aware that while FHA loans are considered less risky for most lenders, not every lender is approved to provide FHA loans. The FHA maintains a list of FHA approved lenders and each borrower should investigate the programs and loan options available before making a final decision.