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FHA home loans are not specifically intended for first-time home buyers, but many house hunters who have never purchased real estate before turn to the FHA home loan program because of the low down payment requirements and other borrower benefits.

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FHA.com is a privately owned website, is not a government agency, and does not make loans.

How Do FHA Loans Work?

May 5, 2019

How Do FHA Loans Work?
FHA home loans are not specifically intended for first-time home buyers, but many house hunters who have never purchased real estate before turn to the FHA home loan program because of the low down payment requirements and other borrower benefits. Do you know how FHA home loans work?

The FHA itself does not lend money, but it does guarantee the mortgage on behalf of the borrower; if the borrower defaults on the mortgage and the home is foreclosed upon, the FHA reimburses the lender.

That does not let the borrower off the hook financially; a foreclosure negatively affects credit scores and makes it difficult to qualify for a new line of credit. But the FHA loan guarantee does help the lender to decide whether to approve the loan in cases where the borrower has less than stellar credit.

FHA home loans require a minimum down payment of 3.5% for the most qualified borrowers. FHA loan program rules require a higher down payment of 10% for those who have marginal credit scores; lender requirements will also apply in addition to the FHA loan program’s rules.

The down payment is separate from all other loan expenses. You may accept gift funds from family, friends, or employers for the down payment but these funds are required to be documented by the lender and must come from approved sources and not payday loans, credit card cash advances, etc.

The home must pass an FHA appraisal and the appraisal value may or may not be close to the selling price. In cases where the sales price is higher than the appraised value, the borrower cannot be forced to close the deal and may walk away from the deal without penalty or further commitment.

The borrower is permitted to pay the difference between the higher sales price and the lower appraised value in cash at closing time, but this cannot be financed into the loan amount.

FHA home loans do not require private mortgage insurance (PMI) but does require an up-front mortgage insurance premium (UFMIP) and monthly mortgage insurance premiums (MIP) that are added to the mortgage amount due every month.

You can finance the entire amount of the UFMIP or pay the entire amount in cash at closing.
FHA loans require occupancy which is why at least one borrower obligated on the mortgage note must occupy the home as his or her primary residence within 60 days of closing in most cases.

FHA loans do not have a minimum or maximum income amount requirement, and are not need-based mortgages. Any financially qualified borrower can apply whether first-time home buyers or not.

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