6 Myths of FHA Lending - What's True What's Not!

Though FHA Lending now represents more than 30% of mortgages, there are still a lot of misconceptions that both real estate agents and the First Time Home Buyers have about this program. All the myths that I have listed below have been raised to me numerous times. I finally decided to post a blog on this so that I can clarify this to a much larger audience.

1. It takes longer to close an FHA Loan- Towards the 2nd half of last year when FHA loans started exploding, most of the lenders were caught off guard. They did not have enough trained underwriters to take decisions on the loans that were being sent their way. That resulted in longer turn times for FHA loans. Within months, lenders realized that this was soon becoming the fastest mortgage product on the block. Since then they have staffed themselves adequately on the FHA underwriting side and hence it's not atypical anymore for FHA loans to close in 30 days or less.

2. Interest Rates are higher - While interests rates are situation specific and can potentially change multiple times just in a day, FHA loans are usually priced the same as conventional. Sometimes they could be cheaper while at other times they could be slightly expensive.

3. Closing Cost is higher - FHA charges 1.75% up front Mortgage Insurance as  closing cost. That could make you think that you will have to bring that extra 1.75% to closing table. While that 1.75% is considered a closing cost, it's added to the loan amount, e.g. if your base loan amount was $400,000, your final loan amount actually becomes $407,000.  As you can see FHA loans do not increase the amount of closing cost that you need to bring at closing.

4. Income Limits to Qualify - To qualify for FHA loans there are absolutely no house hold income limits. Meaning you could be making $1 million a year (or more) and could still be eligible for an FHA loan.

5. Can't sell/refinance quickly- FHA loans just like most of the conventional loans have no Pre-payment Penalty. What that means is you can sell your house or refinance anytime you wish to after closing the transaction.

6. Appraisal Requirements are tougher -In December 2005, FHA made a number of changes to appraisal guidelines allowing for "As-Is" appraisals even if minor defects to the property conditions exist. FHA appraisals now only require repairs for conditions that rise above cosmetic defects, minor defects, or normal wear and tear. Mostly, the appraisal requirements now resemble that of Conventional mortgages.

Originally posted at - www.LendingExpertBlog.com

______________________________________________________________________________________________________

Shashank Shekhar

Mortgage Broker/Banker | San Jose, CA

(408) 615-0655 | Shashank@ArcusLending.com

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Comment balloon 5 commentsShashank Shekhar • July 06 2009 12:11PM

Comments

Thanks for the post.  I handle many REO properties and the most common question I get asked from other agents is "Is the property FHA approved?"  I have recently seen FHA approvals with appliances missing, required roof repair, light fixtures missing.  More of it depends upon the lender and if they have any requirements.

Posted by Todd Kevitch, Experienced - Personally Listed & Sold 500+ Homes (BPO Realty -Personally listed & sold over 500 homes) about 9 years ago

I read your post and wondered about #4.  While I understand that a person earning $1M or more can qualify, can a person making $30,000 a year?  You have to be a little clearer, and trust me, the notion that people who make $1,000,000 a year (or more) really would want a FHA is funny.

Posted by Carla Muss-Jacobs, RETIRED (RETIRED / State License is Inactive) about 9 years ago

FHA approved REO Properties "as is, where is"? Very interesting!

 

Posted by Robert Ott (Century21 Beal Inc.) about 9 years ago

Shashank you did a very nice job with this.

There are common misconceptions about FHA and you hit the main ones that I hear about on a day to day basis.  Nice work!

Posted by Kris Wales, Real Estate Blog & Homes for Sale search site, Macomb County MI (Keller Williams Realty - Lakeside Market Center) about 9 years ago

Thanks for all the feedback. Carla - you are right, I could have done a better job at explaining point #4. I should have mentioned there are no upper cap on income limits. And yes, I haven't done any FHA loan for a borrower who makes million a year :)

Posted by Shashank Shekhar, San Jose, CA Mortgage Broker/Lender (Arcus Lending) about 9 years ago

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