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FHA 101

You’ve decided to buy a home, you’ve selected the best realtor in town, and now the realtor has given you the task of becoming pre-approved.  The next step is to contact a lender who can guide you through the pre-approval process.

Once you find a mortgage lender, you will complete a mortgage loan application.  From that application, your mortgage lender will identify the loan products for which you are eligible and will probably make a recommendation.  If an FHA loan has been recommended to you, here’s an overview of that product.

Program Basics

  • Owner occupant only for purchases
  • A non-occupying co-borrower is allowed
  • Minimum credit score of 620 (current guidelines at First Home Mortgage)
  • Minimum down payment of 3.5%
  • The entire down payment can be a gift
  • Upfront mortgage insurance of 1.75% of the loan amount
  • Monthly mortgage insurance for the life of the loan [rate is based on the LTV (loan to value)]
  • Mortgage is “assumable,” meaning a buyer of your home can take over your loan
  • The seller may contribute up to 6% of the purchase price towards closing costs, points, and prepaids
  • A renovation loan product, called a 203(k), is also available

Minimum Property Standards

One downside to an FHA loan is that the minimum property standards are more demanding than a conventional loan.  The guidelines require the following criteria be met:

  • Safety: The home should protect the health and safety of the occupants.
  • Security: The home should protect the security of the property (as explained in the previous section).
  • Soundness: The property should not have physical deficiencies or conditions affecting its structural integrity.  Source of text.

If a property has missing handrails, chipping paint in a home built prior to 1978, or termite damage that could impair the structural integrity of the property, it will not qualify for FHA financing unless the repairs are made prior to closing on the home.  Follow this link for additional examples of FHA’s property requirements.

If you find out the underwriter is requesting repairs to the home prior to closing, your realtor will try to negotiate repairs with the seller.  If the seller isn’t willing or able to make the repairs, you may be able to switch to a 203(k) renovation loan.  With a 203(k), you can finance the cost of these repairs into your loan, and you will be able to close before the repairs are made.  The lender will then hold the repair funds in an escrow account and disperse them to the contractor(s) performing the work to your home.

If the seller is a bank, it is less likely they will agree to make repairs, but I have had it happen before.  The most important thing to remember when dealing with a property sold by a bank is to have patience.  It will take longer to get an answer back from them, but they may be willing to comply knowing that anyone trying to obtain FHA financing will run into the same hurdle.

FHA Interest Rates

Here’s some good news:  FHA interest rates will be lower than conventional interest rates.  Because of this, even though the mortgage insurance is more expensive, the monthly payment isn’t significantly higher.

Getting Rid of FHA Mortgage Insurance

FHA mortgage insurance used to drop off of the loan, but the rules changed in 2013.  The only way to get rid of FHA mortgage insurance now is to refinance into a conventional loan.  If you are buying your forever house, it may be a good idea to look into that at some point.

If you have questions about whether an FHA loan is the best product for you in Virginia please contact me for a mortgage consultation. To stay informed, follow me on Twitter and like me on Facebook.  Also, I work with the best realtors in Richmond VA, and I would be happy to recommend someone who specializes in the type of home for which you are searching.

If you are interested in purchasing or refinancing in one of the following states, I will be happy to connect you with a licensed loan officer or connect you with a realtor in your state: Maryland, Delaware, Connecticut, Florida, Georgia, Maine, Massachusetts, New Hampshire, New Jersey, North Carolina, Pennsylvania, Rhode Island, South Carolina, Washington D.C., or West Virginia.

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