FHA financing is a great option for buyers that do not have at least 10% as a down payment and/or do not have FICO scores of at least 720. And, there are some important things to know about FHA financing so that when a FHA buyer goes through the process, the stress and frustration is at a minimum, since the buyer is already prepared for the FHA process.
First of all, the main qualifying factors for a FHA loan is that the LTV (loan to value) can not be more than 96.5% of the purchase price, meaning that the buyer needs a minimum of 3.5% as a down payment. That down payment can be the buyer’s own money or be gift funds (funds that are given by friends, family members, employers, etc that do not have to be paid back). Under FHA guidelines, the seller can pay up to 6% of the buyers closing costs, but none of this money can go towards the buyer’s down payment. There is also an Up-Front Mortgage Insurance Premium (UPMIP) of 1.75% of the loan amount. This fee can be added to the loan amount. And, there is also Monthly Mortgage Insurance (MMI) of 0.55% of the loan divided by 12. Once you obtain 20% equity in the home, you can get rid of the MMI.
So, as you will see, FHA loans are not cheap loans to obtain, but when a buyer does not have at least 10% as a down payment and/or FICO scores of less than 720, it is a great option to get a buyer’s foot in the door to home ownership and the benefits definitely outweigh the negatives on a number of levels.
What is REALLY important to know when going through the FHA process and obtaining FHA financing is that this type of loan is absolutely a full document loan, meaning, the lender wants to see anything and everything about the buyer’s financial history, credit, bank information, tax history, income, debt, and anything else they can know about the buyer. The buyer needs to give the lender A LOT of documentation and information and this gathering of information can sometimes obtained by the lender throughout the entire transaction, depending on how complete the file was in the first place, when the package was delivered to the FHA underwriter for the initial preapproval.
The underwriters pick apart the information with a fine tooth comb and the information has to be extremely accurate and complete, or the underwriter will ask for additional supporting documentation. It can consist of explanation letters, more documented information, etc. For example, if the buyer had a nick name that is on some information, the buyer will have to explain it. If there is a lapse in employment, alimony, child support, etc, the buyer will have to explain it. If there is a ding on the credit, the buyer will have to explain it.
As a buyer for a FHA loan, you can basically be prepared to explain every detail of your life for the last 2 years. If you want the process to go smooth and faster, the best thing you can possibly do is to get with the lender and give as complete of a package as possible upfront. So, if you have a name change, issue with credit, etc, explain it in a letter upfront. Do not try to hide anything or leave anything out of this package, or else it WILL come back to haunt you and the underwriter WILL catch it and then the process will be delayed.
And, when you are in contract to buy a home, and the package is not fully complete, and the underwriter is asking for all kinds of information that you must gather, it can be very stressful, since now that you are in contract, there are deadlines to meet with the contractual obligations to the seller and deadlines to close the deal on time. Being thorough upfront is the key to success. And, choosing a good lender who is thorough and can help you through the process and gather all the information and screen it well BEFORE it goes to the underwriter is really key to a smooth transaction.
Also, FHA is very swamped with loans right now, so it is a good idea to ask for a 45 day closing for any transaction that is dealing with FHA. 30 days escrows are possible, but it is pushing the envelope and can be stressful to close in that amount of time. Also, asking for a long loan contingency period also takes off some pressure. I am working with a lot of buyers that are obtaining FHA financing and these are the types of things I am running into with these transactions. And, to avoid stress and frustration once a buyer actually finds a home, having the initial preapproval package as complete as possible, will really help a lot. And, making sure to choose a thorough lender definitely helps to make the process smoother.
And, of course, to really make the process run efficiently, the buyer would call me as their Santa Clara and Alameda County realtor who will stay on top of the process throughout the whole transaction and make sure everyone is doing what they need to do to get the deal closed, as well as stay in communication with the buyer consistently so that the buyer always knows exactly what is going on throughout the transaction.