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FHA Loans
Among the multitude of loan programs that are available to a potential home buyer is the traditional FHA loan. While the FHA loan was once looked upon as more expensive and too time-consuming to pursue, many changes have been occurring.
Most recently, FHA has announced that the Up Front Mortgage Insurance Premium will be reduced from 2.25 percent to 1.5 percent, effective January 1, 2001. This reduces the amount of money borrowed, and thus makes the actual attraction of the FHA loan more significant. In addition, the annual .5 percent premium may be canceled after the loan has reached 22 percent equity. Previously, an FHA loan carried this annual premium for the entire life of the loan!
Generally speaking, an FHA borrower can come to the closing table with 3 percent of his or her own money and walk away owning a home! One of the biggest advantages to the FHA loan is that the sellers participation can greatly affect the requirements that the buyer must meet as far as the required cash investment.
So, when you are writing that FHA contract, keep the following items in mind. If the seller has agreed to cover some costs for the buyer, write it into the contract in this way: Seller agrees to pay $____ in closing costs, prepays or discount points. By including these additional items in fees that can be paid by the seller, the lender can keep the buyer as close to his or her 3 percent required investment as possible.
For example, if Mr. Seller agrees to pay up to $2,000 in closing costs for Mr. Buyer, then the lender can only apply that money toward the allowable closing costs. If this does not total up to $2,000, then
Mr. Buyer cannot take full advantage of the $2,000. Conversely, if Mr. Seller agrees to pay up to $2,000 in closing costs, prepays and discount, the lender can first cover the prepays, which include taxes and insurance money that would normally have come directly out of the buyers pocket, perhaps in addition to his or her 3 percent down payment. The main benefit to this minor change in wording is that the buyer does not pay significantly more than the required 3 percent investment.
Just a few additional things to keep in mind when dealing with potential FHA buyers:
One hundred percent of their funds needed to close can come to them in the form of a gift. This must be documented, but that is not difficult. There are several non-profit organizations available now that work with buyers and sellers to help with grant money to be used as down payment. Ameridream and Nehemiah are two examples of these. The actual process is quite simple don't panic! FHA borrowers can be considered after just two years out of bankruptcy. Lenders tend to be more lenient with credit scores, credit histories and ratios when dealing with FHA loans.
Don't put the possibility of an FHA loan out of your sights for a potential buyer. Just keep in mind the basic information that can help both the buyer and the seller. Establish a good working relationship with a mortgage lender who you can trust to handle this for you. And, above all, make sure to ask lots of questions!
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