What Buyers Need to Know about FHA Loans
You’ve heard about FHA loans and maybe aren’t quite sure what they are and if you should get one or not. These loans have become very popular over the last few years, but there are still lots of misconceptions swirling around. Here’s what you need to know:
FHA Loans 101
What makes them different? FHA loans are mortgages issued by qualified lenders and insured by the Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD).
What’s the latest? Since April 1, 2013 borrowers are now charged higher mortgage insurance premiums on new FHA loans. The annual fee on the majority of FHA loans rose by 0.1%. In early June, the FHA will require borrowers who take out new FHA loans to pay for mortgage insurance for the entire life of the loan.
- The FHA does not loan money or disburse funds. Instead, it guarantees the home loans which are issued by a participating lender. The lender is responsible for processing, approving or denying the FHA loan applications it receives. Most traditional lenders, including Wells Fargo & Co., JP Morgan Chase and Citigroup are able to provide FHA loans to their customers. Here’s a link to find an FHA approved lender: http://www.hud.gov/ll/code/llslcrit.cfm
- FHA loans are not only for lower-income borrowers. FHA loans are available to everyone. There is no maximum income restriction associated with FHA loans, but borrowers do need to substantiate income and assets by submitting proper documentation. This requirement ensures that borrowers are well-vetted and truly able to afford their future homes.
- FHA loans are not only for first-time buyers. Many people believe FHA loans are available only to first-time home buyers, but this is not the case. Whether borrowers are making their first home purchase or their fifth, they can look to FHA loans as a home financing option.
- FHA loans are not just small loans. Loan limits vary across the country, but loan amounts in the DC metro area can be a high of $729,750 for a single unit.
- FHA loans are not affiliated with the section 8 housing program. While both programs are administered by HUD, FHA loans have nothing to do with low-income subsidized housing.
- FHA loans are often more affordable than conventional loans. While FHA loans typically offer the same interest rates as other loans, borrowers benefit from a much lower down payment of as low as 3.5%, and most closing costs and fees can be included in the loan. Since FHA loans are insured by the federal government, it can allow lenders to lend more freely by assuring them that they will be repaid in the event of default.
- FHA loans require credit scores of 500 and above but lenders can still deny you for a FICO score lower than 620 now. It’s gotten more stringent for FHA loans too so that qualified lenders may still require good FICO scores. If you are considering applying for an FHA loan but know your FICO score is lower than 620, contact the FHA directly for a referral to a pre-purchase housing counselor who can give advice on how to improve credit scores and the overall chances of loan approval.
- FHA-approved condo developments can be more desirable to buyers. Under rules in place since February 2010, an entire condominium development must now apply to HUD and be granted FHA approval before a buyer can purchase a unit in an association with an FHA loan or before an existing unit owner can refinance into an FHA loan. So if you’re buying a condo, having an FHA-approved building can be a plus if and when you sell.
Want to know if a condo association is already FHA approved? The HUD website lists all the condo developments in DC, Maryland and Virginia that are FHA-approved. Link to https://entp.hud.gov/idapp/html/condlook.cfm
- FHA loans are assumable. This means that when a seller with an FHA loan sells his or her property, the loan and its financing terms (interest rate) can be transferred to the new buyer. This unique feature will certainly make a property more valuable in times of rising interest rates.
If you have any questions on FHA loans and want help determining if it’s the best direction for financing your home, don’t hesitate to contact us at Dwell!
Thank you to FHA Pros, LLC, a national FHA condo approval service, for compiling some of this information above.