5/27/2017

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FHA Loans

Although they are called FHA loans, the Federal Housing Administration (FHA) does not actually loan the borrower the money to purchase the property. Instead, the loan is originated by a qualified lender using FHA guidelines and then the Federal Housing Administration guarantees the repayment of the loan.

FHA loans are generally easier to qualify for than the typical conventional loan because the credit requirements are not as stringent and the down payment is much less than that of conventional loans, except for the conventional loans that are financed 100%.

Although FHA loans are generally looked at as first time buyer loans, that is not really the truth. There are no restrictions on buying property using an FHA loan, but you have to live in the property.

With a 3% down payment, relaxed underwriting guidelines regarding credit history and allowing gifts for down payment and escrow fees, FHA loans are great for first time buyers and for buyers with moderate income.

FHA lenders offer fixed, as well as adjustable rate loans, and the interest rates charged are competitive with other loan types and in most cases, the interest rate will be lower.

The amount that you can borrow under FHA guidelines depends on where you are trying to purchase, whether you are buying from 1 to 4 units (one of the units must be owner occupied), and if the property is in a special funding area such as Hawaii, Guam, the Virgin Islands, or Alaska.

The most negative impact of trying to finance your home through FHA is the loan limits. If you are trying to purchase a home that is selling higher than the amount FHA will guarantee, you will be required to come out of your pockets with the balance between the loan limit amount and the sales price.

  • For example, if a property is selling for $500,000.00 and the loan limit amount is $450,000.00, you will have to pay the difference of $50,000.00 out of your pocket as a down payment.
  • An evaluation by an FHA approved appraiser must be completed during the processing of the loan and if the property is appraised higher than the loan limit, the difference has to be paid by the borrower or the seller has to reduce the selling price.
  • FHA will not allow the borrower to obtain another loan to make up the difference.

Another issue that may hurt a buyer who wants to use FHA financing is the number of discount points the lender charges. A point equals 1% of the loan amount. A buyer should check with different lenders and get point quotes from each of them.

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