FHA is the new subprime. Everyone wants the business, but not everyone can do these mortgages. However, some loan agents don’t let that stop them–they tell you they can do an FHA mortgage, they take your application, and THEN try to refer it elsewhere (for a fee!) or broker the loan through an FHA-approved lender without telling you. This practice is questionable at best and illegal at worst. The very least that can happen is that the deal will take longer and more can go wrong because your lender doesn’t control the process.
Don’t sign an FHA loan application unless you KNOW that’s the lender you want to use. Why? because unlike other kinds of loans, once you start an FHA loan, it’s hard to switch it to another lender. This is because when you apply for an FHA loan you are assigned an FHA case number. You can only have one at a time, and if you want to change lenders your original lender has to release the case number. And some lenders are less than efficient about releasing case numbers. So this is one more reason to make sure your lender is truly approved to do FHA loans before you start the process–you don’t want the agent to have your case number and then be trying to place your mortgage “somewhere.” While your loan application is floating around, rates could be increasing, your home could fall out of escrow, and any number of things could go wrong.
So take care of business upfront to avoid nightmares on the back end. First, check HUD’s Web site to verify that your lender is licensed and approved to do FHA loans in your state. Just input the lender’s name and you will get your information. Then, ask your loan agent how long he or she has been doing FHA loans–everyone wants to do them now, but you don’t want to be the guinea pig for a newbie loan agent. FHA loans have their own rules and complications; get an expert if you want yours to go smoothly. There’s a great site called FHALoanPros that has lots of information on FHA loans and an expert to answer questions about these loans too.
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Thanks for the useful information - this is very useful for people who don’t have credit problems too!!
Hi Gina,
I’m thinking about buying a house in the fall and would like to know if an FHA loan is the way to go for a first-time home buyer. Can you explain some of the advantages and potential drawbacks of going this route?
Thanks,
Rob
Hi Rob,
FHA is a great program. And this year is an awesome time to be a first time buyer. The feds give you $8,000 in refundable tax credits and if you’re in CA you could score another $10,000 in tax credits if you buy a newly-constructed home.
The chief advantages of FHA are:
Low down payment required–about 3.5%.
Easier credit qualifying–You are eligible for financing 2 years after a bankruptcy (or even only 1 year in certain circumstances).
Less rigorous income qualifying. For example, FHA will allow you to stretch your debt to income ratios if you have demonstrated the ability to handle finances or have a job that is likly to pay a bigger salary in the future.
Fewer pricing adjustments. Fannie Mae loans come with a slew of risk-based pricing adjustments than can add thousands to your closing costs. For example, if you have a credit score of 670, 5% down with a 15% second, you’re looking at paying an extra 3.25% in surcharges. Almost as much as your entire down payment on an FHA loan!
When FHA isn’t the right loan:
You have a substantial down payment. All FHA borrowers pay mortgage insurance premiums, regardless of the size of your down payment. So if you wouldn’t be required to pay mortgage insurance on a conventional loan it is probably a better deal.
You want an ARM or special add-on like an interest-only feature. ARM rates are very low right now and if you have short-term plans for that property, a thirty year loan might not be the way to go.
The property you want isn’t FHA-approved.
Interesting Article. Thanks for the read!
Thanks for reading
Gina