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Thinking About an FHA Loan? 4 Things You Need to Know

Posted On: Jun 30, 2016

So, what exactly is an FHA loan? An FHA loan is a mortgage loan that has been insured by the Federal Housing Administration, a US government agency. An FHA loan requires the borrower to pay for mortgage insurance as a means of protecting the lender from loss if the borrower ends up defaulting on a loan.

So what’s the advantage? Since there is a failsafe in place for the lender to cover them against a loss, an FHA allows for more leniency when it comes to standards and requirements for the borrower.
Here are four things you should know if you are considering an FHA loan.

1. A lower credit score isn’t detrimental.

FHA_Loan_AppraisalMost loans have a minimum credit score the borrower needs to meet in order to qualify, and even then, your credit score can greatly affect the actual interest rate on your home loan. An FHA loan, however, doesn’t have a minimum credit score requirement. In fact, even with bankruptcy in your past, you may still be eligible.

That isn’t to say that your credit score doesn’t matter at all; an FHA lender may still consider a “minimum” credit score to have some assurance you’re able to actually pay back the loan. Credit scores as low as 500 may still qualify, but may require larger down payments and have higher interest rates.

2. You can get help with additional home-buying costs.

FHA_Loan_Appraisal_Rockland_CountyIf you’ve never bought a home, you may be unfamiliar with some of the expenses that come along with the process. “Closing costs” may include attorney fees, title expenses, and appraisal and inspection costs, among others. With an FHA loan, the seller or lender is permitted to pay some of these costs for you.

There is also a special FHA loan product that can help out borrowers who are in need of funds to complete repairs or renovations to the new home. A 203(k) loan is based on the projected value of the home after the repairs are completed rather than the current appraised value, which means the borrower can actually finance additional funds to complete work on the home that otherwise might not have been available.

3. You are required to pay upfront and annual mortgage insurance premiums.

FHA_Loan_Appraisal_Orange_CountyThe major downside to an FHA loan is the required mortgage insurance costs. An FHA loan requires a rather large upfront mortgage insurance cost equal to 1.75% of the loan amount. Although is usually added to the loan amount, it can be a pretty hefty cost.

In many cases there is an annual mortgage insurance premium that must be paid as well, which can vary depending upon the circumstances of the loan, but may be anywhere from 0.80% of the loan amount to 1.25%. This cost is typically added to your monthly mortgage payment.

4. FHA loans require an appraisal by an HUD-approved home appraiser.

FHA_Loan_Appraisal_New_YorkFor an FHA loan, an HUD (Housing and Urban Development)-approved appraiser is required to complete an appraisal process that is specific to FHA loans.

The FHA process requires an approved appraiser because he or she is also required to follow guidelines for inspecting the property as well. Instead of only needing to determine the value of the property, the appraiser also needs to ensure the property meets HUD standards for health and safety.

Any issues the appraiser finds that do not meet the HUD standards mean the issues will need to be corrected before the loan can go through, which isn’t the case in a standard appraisal and home loan.

While FHA loans make it easier for someone with a less-than-stellar credit history get the money needed to not only purchase a home, but to also make necessary updates to the property. However, anyone considering an FHA loan needs to weight this against the insurance costs. If you plan on pursuing an FHA loan, and need an HUD-approved appraiser to complete an FHA appraisal process, give us a call or email