Many years ago when I began my real estate career, FHA mortgages were the dread of real estate professionals. The process was so restrictive and cumbersome that it really was quite unpallatable to work with FHA home buyers.
Home Sellers and Listing Agent's did not want to see an FHA contract because it meant that the seller would have to spend more money just to satisfy the requirements of FHA funding rules.
Buyer's agent's reluctantly took on FHA buyers knowing that getting an FHA deal through would be like threading a camel through the eye of a needle.
Through the years since however, FHA has become a much more user friendly system and with the catastrophic collapse of the sub-prime mortgage market, FHA has now become the premier means of financing a home for a vast majority of home buyers in the US today.
Gone are obtuse rules and mandates about property condition. In their place FHA has focused on ensuring the qualifications of the buyer rather than material aspects of the property involved.
FHA loans today require less money down, and have more flexibile qualification guidelines than do conventional loans.
Typically requiring 3.5% of the purchase price as a down payment
Flexibility with respect to gifts from family members to qualify
Allowance of closing costs to be paid by sellers
Currently, In the DC metro and VA and MD suburbs the maximum FHA loan amount is $729,750 for a single family home and up to $1,403,400 for a 4 family + home.
For people utilizing the 3.5% down payment minimum, there will be a mortgage Insurace premium to be paid. To some people paying mortgage insurance is an ugly expense that is just simply unacceptable or undesirable.
For others, it is a tool getting your foot in the door into first time home ownership and a necessary evil.
Mortgage Insurance is an insurance policy that you pay for as a home borrower/buyer that insures the lender against your possible future default on the loan.
Typically any time a home owner puts less than 20% downpayment on the purchase of a property, the lender will require a Mortgage Insurance premium.
There are 2 types of Mortgage insurance Premiums associated with FHA loans, you can choose either option.
Up- Front MI:
Currently up front mortgage premiums are 1% of the loan amount of the home. This is considered a "closing cost" and should not be misunderstood as part of the 3.5% down payment funds. A home buyer pays this fee at the time of settlement as a one time fee rather than spreading the cost of it over the life of the loan and adding it into the payments. Overall this option is less expensive than spreading it into your loan payments
Annual MI Premium:
An Annual MIP is charged yearly on an FHA loan currently at a rate of .9% of the loan amount. The cost of this charge is divided up into 12 months and added to your monthly loan payment until your home loan reaches 78% or less of the entire home value as long as you have paid 5 years into that premium.
Obviously it is much more advantageous to pay the up-front fee rather than the yearly fee, but your unique circumstance may require one or the other option.
If you can negotiate with the seller of your home for them to pay your MIP, you will probably have to compensate the seller for that amount up front in the purchase price but in the end it may very well make your monthly payments significantly less in the end and your equity will grow much more quickly as a result.
Here is a sample scenario to illustrate:
- a home you are willing to pay $100,000 for
- Your Down Payment is 3.5% or $3500
- Your total loan on that purchase is 96.5% or $96,500
- Instead of offering the seller $100,000, you opt to offer them $101,000 so that they agree to pay your roughly 1% ($974.65) Mortgage insurance premium
For specifics on what your exact scenario would be like, contact one of my preferred mortgage lenders to get your FHA loan Pre-Approval and cost breakdown here http://bouchardgroup.net/lenders.cfm
Part 2 of this series will discuss borrower qualifications for FHA loans
Part 3 of this series will discuss property condition requirements for FHA loans
For a discussion on optional FHA 203K streamlined purchase/renovation loans see the discussion located at: http://activerain.com/blogsview/1939068/home-buyer-problems-we-found-a-great-house-at-a-great-price-but-it-has-some-issues-
Dan Bouchard is eager to serve you as your listing agent or buyer's agent and would be happy to hear from you today.
A. Daniel Bouchard
Service, Results, Integrity you can COUNT On! www.BouchardGroup.net 202-309-2339 mobile
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