A large percentage of people when purchasing a home usually do so by obtaining financing. The common practice is to save up for a home and put down 20%…right? Well, not necessarily. Although there is conventional financing done by most banks that can help buyers with only 10 or 5%, what about those with a little less than perfect credit or just a little less down?? How do we help those people get a loan? That is where most buyers turn to the Federal Housing Administration, or FHA.
Firstly, FHA is *NOT* a bank. It’s more like an insurance FOR the banks. This is the simplified way that it works…Some buyers aren’t perfect in a conventional bank’s eyes. Sometimes they don’t have perfect credit…sometimes their employment history isn’t perfect, and sometimes they don’t have the 5 or 10% to put as a down payment on a house? When this is the case, the person doing your loan will usually sees if you are FHA qualified. FHA has their own set of rules. FHA takes a more DETAILED look at your finances. What is the reason your credit isn’t perfect, and by how much? How DO you pay your bills currently and how can you in the future when you own a home? And instead of 5%, can you qualify with a 3.5% down payment? Now, don’t get me wrong…FHA still has their rules — you can’t have a bunch of collections that you never intend to pay back and have no income for the last year…they have rules…but think of them as more UNDERSTANDING than anything.
If a buyer is qualified, the FHA basically tells the banks that they vouch for you — you’re a good and responsible buyer. And if not and you stop paying your mortgage, FHA steps in and covers most of the losses to whoever gave you the loan like an insurance policy. However…this insurance isn’t free. You as a buyer have to pay the fee for their insurance. Yes, you may get a loan when before you couldn’t, but yes, you also have to pay a fee to do so.
Once you’ve gotten an offer accepted on your home, the loan proceeds just like it normally would. I explain the details of this in my “Home Loan Process” video. Usually, an FHA loan is going to take an extra week or two versus a conventional loan.
Now we discussed a bit about how FHA has their own set of rules…but there’s ONE key difference in the FHA process versus the conventional financing process…Let’s say you’re looking at homes, and you see one that has GREAT potential…the kitchen cabinets and countertops are missing, but you have a friend who owes you a favor and they can help you with it. The heater…geez the heater doesn’t work, but that’s ok because you’re uncle works for an HVAC company and he could get you a great deal!! And yes there’s other stuff that may need semi major repair, but besides all that, this price the home is a bargain!! Now depending on the severity of some of those items, you MAY still be able to get conventional financing…however, FHA also has a rule about protecting buyers.
The basic concept behind the rule is that whatever home you buy, it has to basically be move in ready…working heater, working kitchen and appliances like a refrigerator and stove, and one fully functioning bathroom. There can’t be any MAJOR problems such as a missing heater or a giant crack from a foundation issue. FHA presumes that most buyers aren’t in the home building business — that buyers may be taxi drivers or salespeople or teachers. Knowing how to fix a home isn’t in your background. They don’t care if the home is a good deal, they want to make sure you don’t get in over your head with repairs — after all…if you stop paying the mortgage they have to foot the bill!
FHA’s main goal is to help borderline buyer be eligible to buy a home. And in the process, they want to make sure they don’t get in over their head or get taken advantage of. As to whether or not it’s a better loan for you as a buyer??…that’s something you’re going to have to discuss with your lender…now that’s good to know. 🙂
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