Benefits of an FHA Home Loan
Great Mortgage Rates for Very Little Down and Low Credit Scores
Jan 28, 2009
You may still be able to get an FHA loan with nothing out of your pocket at closing. The FHA program requires 3% down. But that was covered with a third-party “pass through” or short-term loan for closing only offered by various non-profit organizations. This for-closing-purposes-only loan was paid by the sellers' proceeds from the sellers' profit on the sale, known as a seller concession.
That little loophole was closed after the sub-prime debacle. But now, after a howl of protests from the down payment assistance lenders, there is a court injunction reopening the loophole until there is further legal review. So it is still possible to avoid the even low down payment requirement of 3% at the time of this writing!
Help With Closing Costs
There is another seller concession allowed for closing costs to the buyer, of which many first time home buyers are not aware. These closing costs cover expenses that include the appraisal, the title company or attorney's closing fees, and other items that the lender's or mortgage broker's Good Faith Estimate should show.
FHA does allow the seller to pay up to 6% of the loan amount for closing costs that would normally be required from the buyer. This is a generous concession. With FHA loans, that 6% is usually more than enough.
Cost and Loan Amount
However, if you do need to take advantage of those concessions, do not expect the seller to allow a lower price than the asking price. In fact, if the appraised value comes in higher than the current asking price, it is possible for the seller to expect a price to match the appraised value. In addition to covering the buyer's closing costs, the seller may have a 6% or more real estate commission to pay.
The appraisal has to be done by an FHA approved appraiser. The appraisal often costs $100 more than conventional appraisals. As long as there are no repairs that need to be done, which includes covering chipped paint, there will be no problem with the appraisal. Don't listen to old timer realtors who insist that properties are overly scrutinized for FHA deals.
But don't try to buy a fixer upper with an FHA loan either. As long as the purchase agreement signed by both parties does not exceed the appraised value, the FHA lender will accept that price to determine the loan amount.
Credit History and Score
Although FHA requires a little more emphasis on credit scores than before, the score requirements are still low. You could probably get by with a middle score in the mid to low 500 range. A certain amount of credit history is required.
However, alternative credit, which is not part of credit reports but can be documented, is allowed. That can include rental history, buy-here, pay-here items, and even utilities.
The emphasis for reviewing your credit is on the last 12 months prior to your application. So if you haven't had much time to establish credit, this works in your favor.
Rates and Terms
Many first-time home buyers have used FHA loans to finance that first purchase. FHA fixed rates are as good or better than any mortgage that's out there. The adjustable rate loans (ARMs) are more lenient than other ARMs as well. The process tends to be more convoluted than other mortgage processes. But for what you get for what little is required with cash down and credit worthiness, it's worth the extra effort. Just make sure you apply with someone who is very familiar with FHA details and willing to keep you informed.
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