FHA Loans ExplainedBy Deborah Kearns
Homeownership has been the ultimate dream of Americans for generations. In markets with limited affordable housing options, however, that dream might seem out of reach for low- to moderate-income consumers who simply don’t have enough money saved up for a large down payment, but have stable incomes, stellar credit and the ability to afford a monthly home payment.
Since 1934, more than 30 million Americans have achieved the dream of homeownership through the Federal Housing Administration (FHA) loan, a program administered by the U.S. Department of Housing and Urban Development. So how does it work? For starters, the government insures the loan, so lenders can offer your clients a better deal. FHA loans typically have low down payments, reduced closing costs, and less stringent credit requirements than conventional loans. First-time homebuyers, in particular, find that an FHA loan, with a down payment as low as 3.5 percent of the purchase price, provides the leg-up they need to enter the housing market. Home buyers needing help with an FHA loan down payment can receive extra assistance from their state or local government programs, or use a gift from a relative or friend without penalty. Borrowers using an FHA loan typically need a credit score of 580 or higher to qualify for a lower down payment. People with credit scores between 500 and 579 can still obtain an FHA loan, but are required to make higher down payments of at least 10 percent (or more). FHA loans require two types of mortgage insurance premiums: The upfront premium, which can be paid at closing or financed by the borrower in the mortgage payment, is 1.75 percent of the loan amount. FHA borrowers are also charged an annual premium that’s paid monthly and varies based on the life of the loan, the initial loan-to-value ratio and the amount being borrowed. The FHA also offers a special loan product for rehabilitation purchases called the FHA 203(k) loan, which rolls the extra cost of rehabbing a property into the mortgage while providing a set amount of cash to the buyer up front to make necessary improvements to an FHA-qualified property. The FHA has borrowing caps in each state so it’s important for homebuyers using the program to determine how much they can afford and if the amount they afford falls below the loan cap rate for the area they wish to buy in. If you’re working with first-time homebuyers, or buyers with lower incomes, make sure your preferred lender looks at FHA as an option. An FHA loan could be the very thing that puts your client on the path to home ownership, and they’ll thank you for it. Deborah Kearns is an award-winning writer based in Denver with more than a decade of experience in corporate communications and news journalism. She has covered the real estate industry for more than seven years. |
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