Section 3: FHA Loan Benefits

FHA Loan Benefits

The Federal Housing Administration (FHA) backs home loans with flexible borrowing guidelines for homebuyers who might not qualify for conventional loans that have more stringent requirements. FHA loans are popular with first-time buyers who may have limited savings and some credit issues, and the government backing allows many lenders to offer lower average rates than conventional mortgages.

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1. Credit

The minimum credit score for an FHA loan is 500. If your score falls between 500 and 579, you can still qualify for an FHA loan, but you'll need to make a larger down payment. Again, these are FHA guidelines — individual lenders can opt to require a higher minimum credit score. An FHA loan requires a minimum 3.5% down payment for credit scores of 580 and higher. If you can make a 10% down payment, your credit score can be in the 500 – 579 range.

2. Flexibility

Thanks to their flexibility and low rates, FHA loans are especially popular with first–time home buyers, home shoppers with low or moderate incomes, and/or lower–credit home buyers.

 

3. Down Payment

You have to put at least 10% down if your credit score is 500 to 579. It's a big pothole on the road to homeownership: the down payment. But Federal Housing Administration loans allow down payments as small as 3.5%. On a $300,000 home, a 3.5% down payment would cost $10,500.

 4. Competitive Interest Rates

Conventional loan interest rates are typically a little higher than FHA mortgage rates. That's because FHA loans are backed by the Federal Housing Administration, which makes them less “risky” for lenders and allows for lower rates.

5. Lifetime Benefit

One of the most common misconceptions about the FHA mortgage program is that it's a one-time benefit. Borrowers who qualify for this loan can use this program over and over again, and the benefit never expires. 

 

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6. Prepayment Penalties

Unlike mortgages issued by some traditional lenders, Federal Housing Administration (FHA) loans do not have prepayment penalties.

7. Foreclosure

With an FHA loan, the U.S. Department of Housing and Urban Development takes possession. When the FHA foreclosure is done, the FHA will pay back the lender and HUD will prepare to sell the home. When you took out the FHA-backed mortgage, you were required to purchase mortgage insurance. This insurance is what HUD uses to pay back the lender.

8. Appraisal

In most cases, your FHA appraisal will confirm that the house is in good condition and the market value is what you expected. If that’s the case, the house will be approved for an FHA loan and you can move forward with closing.

In other cases, your FHA appraisal might bring up some issues that you, the seller and the lender need to address before the property is approved. Some of the most common problems include:

• Repairs: FHA appraisals may note repairs that must be made before the loan can go forward. When this happens, the house is conditionally approved, and the appraiser notes what the market value will be after the repairs. In the meantime, you have to work with the seller to ensure the repairs are made before closing, or in certain cases, funds may need to be put in an escrow account if the repairs have to be completed after closing (e.g. exterior painting during winter months in colder climate  states).
• Low appraisals: If the market value is below the sales price, you can choose to withdraw from the contract and get your deposit refunded.  Alternately, you can ask the seller to reduce the price so that you can still get the same FHA mortgage. A final option is that you can apply for a smaller FHA loan and pay for the difference with additional assets.
• Deal breakers: If the appraisal notes a health or safety hazard that the seller will not agree to fix, the lender won't approve the property. For example, the FHA usually won’t insure a home that needs major repairs to be livable such as a structural crack in the foundation. In this case, you can't get an FHA loan. 

9. Loan Limit

Loan limits are determined by your county and the conforming loan limits. Although FHA loan limits are very competitive it is important to have that discussion with your realtor and loan officer.

10. Funding Fee

Luckily for FHA borrowers, FHA allows the funding fee to be financed and the monthly MIP is included in the borrower's monthly payment. So, the 1.75% FHA funding fee is automatically added on top of the base loan amount. Although, a borrower may pay the funding fee out of pocket at closing.

11. Assumability

All FHA-insured mortgages are assumable. Mortgages originated before December 1, 1986, generally contained no restrictions on Assumability, while those originated after that date have certain restrictions. Depending on the date of the loan origination, the lender may require a creditworthiness review of the assumption. Conventional loans cannot be assumed, for example, but FHA and VA loans can. Not just anyone can assume an existing mortgage. You still have to apply with the lender and qualify for the loan. You generally need to make a down payment when assuming a mortgage, and it may be larger than expected.

Common Questions on Conventional Loans

- Are FHA loans better?

Although FHA loans are competitive there are some additional factors that can make this loan challenging. As whole FHA loans are a great option for many borrowers. 

- Are there any benefits to sellers?

FHA loans are competitive and can be an asset for a borrower. Typically, buyers are most concerned with a loan not closing and that is not typically an issue with FHA loans. 

- What are Orbit Realty’s and Orbit Home loans benefits?

With Orbit Realty you and Orbit home loans you get the benefit of working with a team that is highly trained and qualified. Okay, maybe every company says they have that, but the truth is that only 10% of companies nation-wide have both a real estate and mortgage company combined and because of that we are able to be one of the most competitive lenders on the market. We are also able to pass savings onto you buy not having to change additional fees that you often see with other lenders. 

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