FHA loans are mortgages and loans granted through the approval of the Federal Housing Administration, which operates as part of HUD’s Office of Housing. Their mission is to increase home ownership in the United States, and they do so by insuring mortgages for lower income and less-qualified buyers.
By offering a guarantee on FHA mortgages, the entity lessens the lender’s risk. You’re not borrowing from the government, but from a government-approved traditional lender. The lender might not otherwise consider lending to you based on your credit score or the amount of money you have for a down payment.
If you’re a lower income buyer or have poorer credit, talk to your real estate agent or mortgage broker to see if you could qualify for an FHA loan. Home sellers should also educate themselves on FHA loans given their importance in the housing market.
FHA Loan Requirements for Buyers
Many first-time or low-income home buyers look into FHA financing. Loans through the Federal Housing Administration are designed to help these individuals better afford the costs of home ownership and qualify for mortgages. The FHA’s goal is to promote home ownership for all Americans.
But, while they have fewer and lower requirements than traditional mortgages, you still must meet some qualification standards.
There are two tiers of FICO scores to qualify for an FHA mortgage. In the first tier with a score of 580 and above you can put down just 3.5%. In the second tier, with a score between 500 and 579, you’ll need a 10% down payment.
Mortgage insurance is required for all FHA borrowers, and the home must be your primary residence. You must provide proof of employment and you must have a regular income stream. And your debt to income rate must be below 43%.
Last, the house must meet strict inspection standards, which is the prime concern of most home sellers.
FHA Loan Issues for Sellers
Home sellers will have an easier time selling their home if it qualifies for FHA financing and they can consider more offers. But, if you already know that your home won’t qualify, it would be a waste of time to accept an offer from an FHA-approved buyer. How can you determine this?
Because of the low down payment requirements and strict loan-to-value ratios with an FHA mortgage, your buyer won’t have much flexibility. If the appraiser’s value comes in too low, the buyer will have to either come up with more money for a down payment, you must lower your price, or the deal could fall through.
The buyer’s credit could also become an issue, even if they’re pre-approved for a mortgage. Their credit situation could have worsened in the time between pre-approval and applying for the loan. The FHA-approved lender could decide that they want more reassurances or could have tougher lending policies.
Last, there’s repairs. The FHA has issued standards that properties must meet to be approved for a loan. The owner must fix Items such as peeling paint or unsafe access to the basement before the lender issues the mortgage.
Unlike other mortgages, you can’t just give the buyer a credit at closing to make the repairs themselves. The home must be delivered in a condition that meets FHA standards, which means more work for the home seller. Because of these risks, some sellers prefer not to accept offers from buyers using FHA financing.
Tips for Buyers Using an FHA Loan
Before applying for an FHA loan make sure you meet their requirements. If not, it will also be difficult to qualify for a traditional mortgage. If you have concerns about qualifying, look at the items you can improve, such as bringing up your credit score or saving more for a down payment before home shopping.
When home shopping, ask if the buyers will consider FHA-approved applicants before even touring a home. There’s no point in falling in love with a place you could never buy.
When walking through potential properties keep the FHA home inspection list in mind as you evaluate their condition. While the need to make repairs might not scuttle a deal, they could delay a closing timeline.
Tips for Sellers Accepting FHA-Approved Loans
Talk to your real estate agent about whether your house could qualify for an FHA loan. If just a few small fixes are needed, you might want to take care before listing to widen your pool of potential buyers. Walk through your house with the FHA list in-hand and see where you’d need to make improvements, and if it’s even worth it for you to entertain offers from FHA-approved buyers.
If your agent has prepared a comparative market analysis and you’ve priced your home at the top of the market, know that this could lead to home appraisal issues. Think about pricing your home in the mid-range of your market instead.
Many of the issues that could make an FHA deal fall through could also harm a deal with conventional financing. A home’s condition and appraisal is always an important part of the financing process. A Clever Partner Agent can help both buyers and sellers navigate the waters of FHA mortgages and close the sale at a fair price.