What to know about FHA loans
Federal Housing Administration, or FHA, loans are an increasingly popular choice; they allow buyers to purchase a new home even when they may not have the cash up front to do so normally. FHA loans are backed by the government, protecting lenders against defaults. Available with both fixed and adjustable rates, FHA loans are becoming more commonplace. The following are six things that real estate professionals need to know about FHA loans.
Loan amounts are based on net, not gross, income
Many first time buyers calculate how much they will be able to afford based on their gross income, or how much they make before taxes, insurance, Medicaid, and more. Instead, help buyers calculate a loan amount of their net monthly income; the monthly payment should not exceed 31% of their monthly take home income.
FHA loans require mortgage insurance
Potential buyers should be aware that FHA loans require monthly mortgage insurance. This may significantly increase their monthly payment – and change how much they are able to afford. Most FHA require that this insurance is paid for the entire life of the loan, unlike conventional loans in which PMI is only required until 20% equity has been reached.
Not much cash is needed to close
Closing costs can be a major hurdle for those trying to buy their first home. Borrowers taking out an FHA loan can roll closing costs into the loan; likewise, gift funds can be used to help cover closing costs.
Max loan amounts vary
The max loan amounts for FHA loans vary by location. Buyers should verify with a lender about the max amount allowed in their specific area. In Hawaii, for example, the maximum amount allowed is $721,050; in Phoenix, Arizona, it is significantly less at $271,050.
The lender is still in control
While FHA loans are guaranteed by the government, the lender is still very much in control. Banks have their own FHA underwriting guidelines, lender overlays, and mortgage rates. Just like with a traditional mortgage, buyers should shop around to find the best rates and lender.
Sellers may be leery of FHA loans
Many sellers falsely view FHA loans an as risky; in a multiple offer scenario or in a competitive market, sellers may go with other loan types to avoid credit issues or closing delays. Help potential buyers make their offers stronger by offering to take the home as is or offering the full asking price.
by Author, Jan. 11, 2019