For the home buyer with somewhat limited financial assets and down payment affordability, but good credit, and of course the means to carry a monthly mortgage, which includes many first-time home buyers, the Federal Housing Authority (FHA) offers a very cost-effective method of financing a home.
The FHA currently allows some of your closing costs to be paid by the seller; up to 6 percent of the loan amount, but as of October 4th, 2010 the seller’s contribution to closing costs will be lowered to 3 percent.
Of course, the buyer may have to pay a somewhat higher price for the property due to the seller’s contribution towards closing costs.
FHA programs include the one-year ARM, the buy-down, in which the borrower can lower the interest rate through payment of points or interest at closing, and the fixed-rate loan.
The FHA down payment requirement is lower than for most conventional loans, but there will be some changes regarding required mortgage insurance payments under FHA’s Mortgage Insurance Program (MIP) that will be affected by the new FHA regulations that will be in force beginning on October 4th.
Beginning with this change, upfront costs of the MIP factor will increase from the current .55 to .90. The premium, which is usually financed into the loan, will be reduced from the present 2.25 percent to 1 percent, which would allow the buyer to finance a smaller mortgage. Applying for an FHA loan prior to October 4th would save the buyer the cost of paying the MIP increase.
Under FHA financing regulations, the seller must pay certain closing costs, such as the underwriting fee, document preparation fee, courier and assignment fees. Contract wording will specifically designate buyer and seller payment responsibilities.
It is a common misconception that the federal government finances an FHA loan, when in fact, FHA loans are actually brokered to the secondary market as are conventional loans.Quicker appraisals mean that closings can be accomplished in thirty days or less since loan officers can use an FHA appraiser of their choice.
It’s important to point out that sellers are not as reluctant as they were in the past to accept buyers who were planning to finance through an FHA loan, since once stringent repair requirements have softened over the past few years.
Furthermore, depending on how the contract is written, the seller and buyer can share some of the responsibility for affecting certain repairs, and/or the seller could request that a dollar cap on the cost of repairs be written into the contract in order for the seller to accept a buyer’s FHA loan purchase proposal.
It is also important to remember that the FHA requires any and all additions, renovations, upgrades, etc. be up to code or brought up to code, and that any health and safety issues have been addressed, and the building is structurally sound.