FHA loans were originally created for the first time home buyer as an assistance program. FHA (Federal Housing Administration) began “backing up” or insuring certain loans for mortgage companies, savings and loans institutions, banks and other lenders to convince them to lend to first time buyers. The program worked so well, that it is now widely known and available.
It is important to understand that FHA does not issue the loan itself, a typical lender actually provides the loan, FHA merely insures the loan (in part at least) against default from the borrower. Thus, if a borrower stops paying their loan, the lender has the opportunity to file a claim with FHA to recover some or all of the money. As you might guess, this made lending to first time buyers and buyers with less than perfect credit more attractive to lenders. Lenders are exposed to less risk in lending to this type of buyer, and thus approved more loans.
Although FHA provides a greater opportunity for borrowers to obtain financing, it also requires more information / documentation prior to loan approval, such as:
- Minimum Property Conditions
FHA requires the property to meet certain conditions in order for the loan to be approved. Many property listings offered by HUD will state if the home meets the FHA minimum requirements. Look for “FHA Insured” on the property listing to know for sure. If it is not a HUD listing, or does not say if it is FHA insurable, ask your realtor specifically about the property. Note, if a property does not meet the minimum conditions, this does not mean the loan will be denied, FHA may simply require that the house be repaired to meet the conditions before they approve the loan, or you may be able to obtain 203-K Rehab Loan to take care of the repairs.
- Termite Inspection
Unlike typical conventional loans, FHA requires a termite inspection to be performed on the subject property. Although it is relatively inexpensive (maybe $100-$150) it is still a hassle and can cause the loan processing time to increase.
- Additional Fees
Some of the underwriting/attorneys fees etc, may be slightly higher when going FHA, but it is usually minimal.
- Increased Processing Time
With the additional information requirements enforced by FHA, the loan processing time may be increased. Lenders are getting much better at processing FHA loans, so if you retain a quality lender, they should still be able to process the loan and get you ready to close within the standard 30 day time frame.
In closing, FHA is a great program to help folks acquire financing. Although there are some hoops that you have jump through to get approved, there are many benefits to FHA loans, the chief of which is the down payment. FHA only requires a 3% down payment to purchase a home which is very attractive to many buyers. Stay tuned for more information.