Buying a Home with an FHA Loan

by Gina Pogol
June 24th, 2010

Buying a home with FHA is a bit different than buying when financing with a conventional mortgage. The government wants the purchase done in such a way that it minimizes your risk of losing the home, and the FHA having to pay a claim if you default. So there are some provisions that must be part of your contract when you buy a home using an FHA mortgage.

First, it makes sense to know FHA loan limits in your area. If you plan to use an FHA loan, with its advantageous 3.5% down payment requirement, flexible underwriting, and assumability, you have to keep your loan amount within FHA’s limits. So know what that is before you start searching for homes.

It’s also best to do your mortgage shopping before you shop for your home. You’ll want to be pre-approved for your home loan, but you don;t want to start the approval process until you know which lender you’d like to use. That’s because you are assigned a case number when you apply for an FHA home loan. Once you have a case number, if you want to change lenders it will need to be reassigned. Some lenders can be a little slow with the reassigning when you dump them for new lenders.

Next, you’ll be working with a real estate agent (make sure he or she knows that you plan to finance your purchase with an FHA mortgage). When you write your offer to purchase, FHA requires certain provisions. First, there are some charges that you are not allowed to pay when you finance through FHA. So the seller may have to pay them instead. Examples of such unallowable charges are tax service fees, origination charges exceeding 1% of the loan amount, and any markups beyond actual costs for appraisals, credit reports, etc. FHA allows sellers to pay up to 6% of allowable closing costs for buyers but that is being changed to 3%, probably as you read this.

Your contract will also need an amendatory clause, which states that, should the property appraise for less than the agreed-upon sales price, you will be allowed to back out of the purchase. FHA may require certain repairs before you can close on your purchase; your contract should include a maximum cost for repairs that can be incurred by the seller.

Your FHA appraisal is different from a regular appraisal; it costs a little more and includes some basic inspections, like a search for earth-to-wood contact. If there is a well on the property, a pump test may also be required.Remember though that an FHA appraisal is no substitute for a whole-house inspection, and FHA recommends that you get one before closing on your new home.

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