FHA mortgages are experiencing a resurgence. The average home buyer doesn't really understand why that is important or how it impacts them. A home buyer usually applies for a loan accepting what the loan officer suggests for the loan program. Seldom does the consumer ask why an FHA loan is suggested over a conventional mortgage.
Whereas I am not a mortgage officer and my explanations are very basic, here are a few characteristics of FHA mortgages. Knowing a little bit about FHA lending can prepare the buyer for how an FHA loan might impact the transaction.
- An FHA mortgage is insured by the federal government. There will be a mortgage insurance premium rolled into the buyer's mortgage to cover this insurance.
- Prior to the easy (and sloppy) lending of the feeding frenzy years, FHA mortgages had easier qualifying criteria making it easier for a home buyer with less than perfect credit to obtain a mortgage through FHA programs.
- The minimum down payment with an FHA mortgage is 3% and that amount can be in the form of a gift from a relative, charitable organization, or employer (Some changes have been made to this rule in the Housing and Recovery Act of 2008.).
- Appraisals for FHA mortgages often included "work orders" which had to be completed before the lender would grant the mortgage. Since FHA buyers often were more "borderline" in their financial strength, FHA wanted to make sure the homes they financed were not going to require extensive repairs which could sabotage the new buyer's successful repayment of the loan.
There are several reasons why an FHA loan could impact the purchase of a home, especially if there is a multiple offer situation or the buyer has chosen a foreclosed or short sale property. In a multiple offer, an FHA mortgage of identical terms may lose if the other offer is a conventional mortgage. The fact that qualifying criteria and down payment requirements are less can give the message to the listing agent that an FHA buyer is less strong than a conventional mortgage buyer. The possibility of work orders being required by the appraisal can decrease the seller's "profit" from their house sale as well. Sellers who are selling their homes for less than they owe (short sales) are obviously strapped for money and often do not have the funds to make repairs making an FHA buyer less attractive. Foreclosed properties that are owned by lenders often have deferred maintenance which will be considered as work orders by FHA and lenders are unwilling to spend money to fix a property in which they have already lost money.
Whereas some home sellers are skittish about FHA financing, most are not. FHA was designed to encourage home ownership, especially for first time buyers. In today's market with the tightening of mortgage guidelines, FHA mortgages have returned to being a viable option for many buyers.