I've recently been working with several buyers who are purchasing homes in Pittsburgh with an FHA loan, which has resulted in some interesting challenges. An FHA insured loan is a Federal Housing Administration backed mortgage which is provided by FHA-approved lenders. FHA backed loans have the benefit of allowing for lower down payments and have historically allowed lower income Americans to borrow money for the purchase of a home that they may not otherwise be able to afford.
With the tightening of the mortgage market over the last two years FHA backed loans have become very popular, with close 38 percent of all home purchase mortgages, including 60 percent of all African-American and Hispanic home purchases being made using this type of loan in 2010. (Source: www.thetruthaboutmortgage.com)
The two biggest draws of the FHA insured loan is the low down payment, as little as 3.5% down, and the ability to get a loan with a credit score as low as 580 (or 500 if you can put at least 10% down). FHA will also allow up to a 6% seller assist towards closing costs (although this could change soon), as opposed to the 3% maximum of most Conventional loans.
With all those benefits an FHA insured loan is a great option for many buyers, but their are a few pitfalls to be aware of.
FHA loans are not a good option for "fixer-uppers". If the house you are considering has lots of work required you may have a problem using an FHA loan to purchase. FHA appraisers review the condition of the home and detail repairs that must be made to the home prior to closing. These could include items like peeling paint that must be scraped and painted, Cracked windows repaired, gutters repaired, roofs repaired and other similar issues. Even if the buyer was planning to make these updates in the future and/or doesn't mind purchasing the home in as-is condition, FHA won't allow it, the work must be done before settlement. While FHA does have a loan called a 203K loan that will lend money for repairs, these are becoming harder to get and require the buyer to jump through many hoops.
Some homes won't qualify for FHA insured loans. Specifically condos and townhomes need to be on a FHA approved list in order to be eligible for an FHA loan. FHA wants to validate the health of a condo community before they invest in the property.
FHA loans have a higher mortgage insurance premium (MIP). FHA loans requires a 1% MIP paid upfront (this just went up in April 2011) and then a monthly premium as part of your mortgage payment for 5 years or until the loan amortizes to 78% – whichever is longer.
FHA appraisals have very strict guidelines, and once they are completed the value will apply to the home for 6 months, so a low appraisal can sink a sale even if you and the seller agree to a higher price. If an appraiser can't find comps that apply to the home they won't be able to supply a value, this can be particularly true for homes with wells or septic systems when the surrounding homes do not.
With all the benefits of FHA insured loans it is important to realize that not every home can be purchased with one. Be sure to let your real estate agent know upfront if you are using a FHA loan and ask them to advise you of potential FHA issues in houses you are interested in.
Planning to buy or sell a home in Western Pennsylvania? Call Christa Ross from RE/MAX Select Realty, at 724-933-6300 x214 (office) or 724-779-1437 (direct) or visit my website at www.bestpittsburghhomes.com.