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5 Things You Probably Don’t Know About FHA Loans

From Bill Holmes – Ann Arbor Mortgage

As mortgage rates begin to rise, FHA loans have taken on renewed importance for today’s mortgage borrowers.

An FHA loan is a mortgage insured by the Federal Housing Administration, an agency of the Department of Housing and Urban Development. All borrowers with FHA loans pay for mortgage insurance, which protects the lender from a loss if the borrower defaults on the loan.

Here are some myths about FHA loans.

Myth 1: I make too high an income to qualify

There is no maximum income limit for an FHA loan as there are with some other government loan programs. We can also use a non-occupant co-borrowers to help qualify for a higher mortgage amount.

Myth 2: My credit is not good enough

FHA does not mandate a minimum credit score, but most lenders can overlay their own requirements on top of FHA’s guidelines. Most lenders require a minimum credit score. Each borrower’s credit worthiness is considered in context. Some leeway is allowed, even for borrowers who have filed for bankruptcy or had a foreclosure.

Myth 3: The down payment is too high

FHA requires a down payment of just 3.5% of the purchase price of the home. Borrowers can use their own savings to make the down payment. FHA allows a gift from a family member to cover not only the down payment, but all of the closing costs and prepaid items as well. Contrast that to a conventional mortgage that generally requires the borrower to put their own 5% down payment into the transaction.

Myth 4: FHA appraisal repair requirements are difficult

At one point, FHA appraisal requirements were very picky. Today FHA repair guidelines are much more reasonable. The biggest repair concerns are: 1. Health and safety issues; 2: Protecting the security of the property and 3. The structural soundness of the property.

Myth 5: FHA mortgage are assumable

FHA loans are assumable, which may prove to be a valuable selling tool when one decides to sell their home. New purchasers would pay the difference between what is owed and what the home is selling for. As long as they meet FHA guidelines, they can take over the nice low rate that the original borrower received. Rates cannot stay this low forever and today’s rates in the low 4% range may be very attractive in the near future.

Added bonus: High seller contributions

There is a higher seller contribution on FHA loans on many conventional loans - 6% as opposed to 3%. This means that you can negotiate for the seller to pay most, if not all, closing costs and prepaid items, which minimizes your out-of-pocket expenses. The seller contribution may also be used to buy down the interest rate for your loan.

 

 

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