FHA Loan Fact and Fiction

February 22, 2017

If you want to purchase a home with an FHA mortgage, there are a variety of options available to you including the types of property you can buy. You can choose to buy a suburban home, townhome, condo unit, mixed-use property, or a multi-unit property (up to four units). There are also options for the type of mortgage you can apply for: 15-year term, 30-year term, fixed rate, adjustable rate mortgage, and other options depending on the lender.

There are many participating FHA lenders waiting to help you, and while FHA loans are NOT available from a financial institution that does not participate, the number of those who do is quite high. But new purchase loans aren’t the only FHA mortgage options available from most participating lenders; if you need to refinance a conventional loan you’re free to find a new lender and refinance into an FHA mortgage. You can also refinance a conventional loan into an FHA mortgage with your current lender if they also offer FHA loans.

FHA Loan Fiction: First Time Home Buyers Only?

FHA loan rules do not offer an advantage to first time home buyers. That does not mean you can’t get a first-time buyer deal from the lender, it’s just not offered via the FHA program. Your participating lender might offer special incentives from that financial institution for the first time borrower, but the FHA loan program itself welcomes all qualified borrowers regardless of their status as first-time homeowners or experienced buyers.

FHA Loan Fact: Lower Down Payments

FICO scores and credit history do have an effect on your down payment requirements, but typically FHA mortgage loans require only 3.5% down based on the adjusted value of the property. You may find conventional loans requiring a much higher down payment-as much as 20% depending on circumstances.

FHA Loan Fiction: Interest Rates

The FHA does not set or regulate interest rates on FHA single family mortgages. Interest rates and other details are things the buyer and lender will negotiate. The only FHA requirement is that interest rates charged on FHA mortgages be “reasonable and customary” as compared to similar loan products available to the borrower (based on the applicant’s financial qualifications). FHA loans do allow the borrower to purchase “discount points” that can lower the cost of the mortgage in the form of lower rates, and this is part of the negotiation of the loan. Especially in cases where the borrower wants to finance some of the discount points (where permitted).

FHA Loan Facts: Credit Check and FICO Scores

Your FHA lender is required to examine a borrower’s credit rating, FICO scores, and other financial qualifications. How can you best prepare for your home loan application? Go into the FHA loan application process with no fewer than 12 months of on-time payments on all financial obligations with no late or missed payments for best results.

In cases where the borrower’s most recent 12 month history includes late or missed payments, the lender has a more difficult time justifying the mortgage loan. But in some cases, late or missed payments may be accounted for if the borrower can show (to the lender’s satisfaction) that such incidents were circumstantial and not likely to occur again.  Be prepared to document this where applicable. Talk to a loan officer to see what your best options are for an FHA loan or refinance loan, especially if the late payment/missed payment factor concerns you.

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