A perfect way to get your foot into the door of homeownership (no pun intended) is to utilize the government insured lending process to obtain an FHA loan.
FHA loans have lower interest rates and low credit scores are acceptable (above 580). Just 3.5% is the required downpayment but you do have to qualify for the monthly payment. Of course nothing in life is free and there are mortgage insurance premiums that must be paid upfront and also monthly.
But the most beautiful part of an FHA, especially if you have good income but not much in savings, is that the lender can cover your closing costs by raising the fixed interest rate slightly.
Recently we worked with a young couple that wisely took advantage of this program. The purchase of a $460,000 required them to come to the table with 3.5% or $16,1000. Their closing costs, which were probably over $11,000, were paid by the lender by increasing the low FHA loan, to a still low 3.95%.
Everything was wonderful and terrific until we came to the inspection and our Request for Repairs. This home had a few issues that the buyers felt needed to be corrected and the seller was in agreement on most of the issues. Here is where an FHA differs from a convention loan. If this was a conventional loan we would have asked for credit toward repairs. This is the preferred method for both parties as neither side wants to have poorly done repairs come back to haunt.
Unfortunately with an FHA loan that is already getting closing costs covered by the lender, crediting isn’t an option. The FHA guidelines state the buyer must bring their own funds of at least 3.5% to the closing. Since we didn’t have closing costs there was no place to put the credit. We could have asked for a reduction in the offer price, but that doesn’t help the buyers.
For example, if they lowered the price to $455,000 the buyers would have to bring $15,915 to closing, saving them a whopping $185 and lowering their monthly by an insignificant amount. The buyers did not have the additional savings to make this costly repairs.
Our story ends with the listing agent calling in a local plumber and roofer to do the repairs. The buyers were made comfortable by being able to talk with each vendor and also get a receipt that included a warranty.
The moral of the story is, FHA loans are a perfect option for buyers, but be aware of the limitations of asking for credit for repairs. So let’s go with the tried and true saying, where there’s a will there’s a way.
If you are looking to buy soon, call us today at 562-243-2171. We know the right steps to help make your journey to homeownership safe and easy.