Many first time home buyers use the Federal Housing Administration (FHA) to get a loan with a lower down payment and other lending requirements that are more accommodating. Before you apply, here is what you need to know about buying a home with an FHA loan.
Why Do People Apply for FHA Loans?
Getting a traditional mortgage is not always easy for home buyers, especially for people buying their first home. Saving up for a down payment of 10 percent could be very difficult for someone with limited funds. FHA loans are designed to provide some minor accommodations to buyers who would not be able to buy a home otherwise. FHA loans offer more flexible requirements on:
- Minimum credit score for approval
- Maximum debt-to-income ratio for mortgage payment and total debt
- Minimum down payment
If you live in a region (be it Fairview or Franklin or anywhere else) where your income is enough to reasonably make a mortgage payment, but home values exceed your ability to qualify for a traditional mortgage, a few extra percentage points in a maximum debt-to-income ratio could allow you to buy a decent home in your area.
How Do I Qualify for an FHA Loan?
You have to meet certain requirements in order to be eligible for an FHA loan. It starts with a credit score of 500 or higher, or 580 if you want to qualify for a loan with a down payment of 3.5 percent. You must be able to come up with the money for the down payment and for a small amount of closing costs. When you apply for an FHA loan, you do not receive money through the FHA itself; instead, the FHA guarantees loans by various banks and lenders in your area. That way, the lenders are more likely to approve a loan for you.
Do FHA Loans Have Special Requirements for Home Buying?
The FHA is very specific about the types of home sales that lenders should approve. In most cases, it affects what the seller can require of the purchase. In a traditional home sale, you make a purchase offer. If your offer is accepted, you negotiate with the seller to decide who covers any necessary repairs and make a plan for the closing costs. FHA sets limits on the amount you can offer for a home depending on the area. A home inspection is typically mandated, and the seller is expected to pay for most required repairs. The seller must also be willing to pay most of the final closing costs on the buyer’s behalf.
What Repairs are Necessary for an FHA Loan?
Sellers can sometimes be reluctant to accept an offer from a buyer using an FHA loan because they required too many repairs before the loan could close. What are the FHA loan requirements for sellers? Many times, sellers could end up paying for the FHA repairs, but today, the FHA repair loan guidelines have eased up and sellers are not the ones required to handle these repairs anymore. Here is a look at the types of repairs are required for the FHA loan.
Who handles the FHA repairs?
Fortunately for sellers, they don't always have to handle the repairs for FHA loan buyers anymore. Depending on the buyer's purchase offer, a buyer's agent can specify a dollar cap on repairs that the seller will agree to do.
That helps with easing the concerns of the seller that doesn't want to take an offer from a buyer with an FHA loan. The seller can also have the buyer be responsible for handling the FHA funding condition repairs that is called for in an appraisal.
What Repairs are Necessary for FHA Loans?
The biggest concerns for FHA loans when it comes to repairs are any health and safety issues. They want to protect the security of the property and structural soundness of the property. If an addition or remodel to a luxury home in Nashville is not finished to code, the FHA may require they be brought to code or they simply won't consider the value of the non-permitted item in the appraisal.
Before closing a loan, your FHA loan will require the following repairs to be completed:
- Exterior doors that don't open or close properly
- Peeling paint in homes older than 1978
- Major plumbing issues or leaks
- Ripped screens
- Leaning or broken fence
- Active and visible pest infestation
- Foundation defects
- Wet basements
- Rotting out building
- Exposed wiring or uncovered junction boxes
- Inoperable HVAC systems
- Leaking or defective roofs
- Missing or inoperable appliances
- Bedrooms missing minimize-sized windows or with bars that don't release
- Standing water evidence in crawl spaces
- Empty pools or those without a working pump
Your FHA loan may ask for other repairs but they don't have to be done before closing. This would include items like cracked glass in windows, missing handrails, removal of debris under the home, minor plumbing defects or worn out carpeting. FHA loans require the home be safe and healthy before closing a loan.
How Can I Entice Sellers to Accept a Purchase Offer?
Because of the additional responsibilities on the part of the seller, some sellers are wary of accepting offers from buyers who have funding guaranteed by an FHA loan. The trick is to find the right seller, or try to catch sellers at a good time. For example, a homeowner who has been trying to sell a home for several months might be more willing to shoulder some added costs just to get the home off the market. If you live in a hot real estate market, you might consider increasing the amount of your purchase offer to sweeten the deal for sellers.
No matter how you finance your home, you always want to make sure that your offer is reasonable for your budget and will leave you with the funds you need for moving and any customization you want to do once you move in. In exchange for more stringent buying restrictions, FHA loans often allow buyers to purchase a home without investing quite as much at the outset.
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