FHA Loans

With all of the changes that have taken place in the mortgage industry, one thing that you should see more and more of are FHA loans. They offer one of the lowest down payment options available which make them a natural fit for most 1st time home buyers, although repeat buyers refquently use this loan program as well. Right now, a buyer will need to show that they have 3% of the purchase price to put down on the loan of the home (there has been debate recently about increasing that to 3.5%). This 3% must be documented, like in a savings or checking account. Every loan will have closing costs associated with it i.e. title insurance- origination fees- appraisal- among other costs. These costs can vary, but will typically be 2-4% of the loan amount depending on that loan amount. Sometimes you need to ask for 6% for closing costs. The lower the loan, the higher the % will be due to most of these costs being a fixed amount. There are ways around both of these percentages though. A very common part of purchase agreements, right now, is for the seller to pay for the closing costs of the loan. And, although down payment assistance programs are no longer available, you can have a relative pay your 3% down payment provided that they supply a gift letter and can show proof that they indeed have the 3% that is needed.

When writing the purchase agreement, a buyer must put an earnest deposit with the offer. On most FHA loans in Michiana, this will be from $500 to $1000. This amount will go towards the down payment of the home, but is needed as a show of good faith to the seller that the buyer is serious about purchasing the home. In Indiana, the deposit is held by the listing brokerage in a non-interest bearing account. In Michigan, it is held by the buyers brokerage.Obviously, the more a buyer can put down in earnest, the more serious the buyer comes across. If the sale falls apart due to the part of the seller, the buyer will get their earnest deposit back. If the sale falls apart due to something on the buyer side--like getting cold feet, then the buyer loses the deposit. Most lenders will also require a deposit for the appraisal that they will have to do on the house.

Another benefit to a FHA loan is that they can be assumed by someone. This used to happen a lot about 15-20 years ago. An example of this, is when a homeowner that had bought their home with an FHA loan has decided to sell the home. When they bought it, they may have taken out a mortgae when interest rates were low, let's say 7%. But when they decided to sell the home, rates were at 10%. The purchaser can assume the loan at 7% as long as they can get approved like they would normally have to. The catch on this though, is that usually a homeowner has built up some equity in the home, so the buyer will have to cough up the difference between what is owed and what the seller wants for the house.

Just like with any loan, you will have to have proper documentation of income and credit history in order to get approved for the loan. There are several things with your credit and income that get looked at. You will usually need a credit score of at least 580, but sometimes lower scores are accepted. You have to show a history of credit, preferably with no late payments in the past year. And you will have to have a good debt to income ratio, which will vary depending on which lender you choose. Not all lenders will do FHA loans, so if your lender says that they cannot get you approved, ask them what kind of loan they were trying to approve you for. There are several different programs available, and they may not be a FHA approved lender.