Can An FHA Loan Work For Me?
What is an FHA loan?
FHA stands for Federal Housing Administration, and an FHA home loan is a loan insured by the FHA. Being insured by the FHA means the loan is guaranteed by the federal government, and guarantee represents a low-risk investment for the loan issuer. If you, as a borrower, default, the federal government covers the loss, assumes the loan balance, and takes responsibility for recovering the loan. All things considered, banks will be more eager to approve you for an FHA loan in the Williamsport Pennsylvania area because of this lower risk.
Pennsylvania requirements
Although FHA approval requirements are the same in Pennsylvania as they are in every other state, Pennsylvania buyers must be aware of state-specific high-, low-, and mid-range cost areas.
How are high-cost, mid-range, and low-cost areas defined?
Whether an area is defined as high-cost depends on a region's median house prices. Specifically, high-cost areas are defined as regions where115% of the median house appraised value for the region exceeds $424,100.
If you are shopping for a loan in the Williamsport Pennsylvania area, it is best to also review median home prices in each county. As of 2018, the sole high-cost Pennsylvania county is Pike county.
Low-cost areas are those where the median appraised house values do not exceed $294,515. Understandably, mid-range areas are defined as areas where the median appraised house values exceed $294,515 but do not exceed $424,100. Understanding the distinction in cost area is important because quite a few counties exceed the 2018 low-cost median appraised house value limit of $294,515 but do not exceed the $424,100 cut-off. In Pennsylvania, these mid-range counties include five counties:
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• Philadelphia
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• Montgomery
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• Delaware
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• Chester
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• Bucks
Knowing a city's cost definition is important because the cost definition of your area determines the maximum loan amount for which you can qualify. The caps for single-unit homes are as follows:
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Low-cost area: $294,515
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High-cost area: $679,650
Basically, if you attempt to purchase a high-priced house in what is considered a low-cost area, you will not be approved for an FHA mortgage. If you want a loan for such a home, you will have to find a home in a cost area that matches your desired loanamount.Another good option to find a loan program that would work for your scenario is speaking with an expert in the mortgage field, like a mortgage broker. They are great at helping families find the best mortgage product to meet their needs.
Because low-cost, mid-range, and high-cost areas might also be defined according to smaller, more precise geographical locations, you might not know how a particular neighborhood, for instance, is defined. For these situations, the department of housing and urban development recommends prospective home buyers use their FHA mortgage loan calculator. This calculator provides loan limits by county, but it also provides information according to "metropolitan statistical area" (MSA). Metropolitan statistical area simply means an area of dense population, usually a city. Searching loan limits by MSA allows you to search within cities and other areas rather than by county.
Single-unit or multiple unit properties
Equally useful is the information regarding loan limits as they pertain to the number of living units. For instance, loan limits vary for single-unit and multiple-unit properties. If a property is comprised of additional units, the loan limit increases. A single-family unit in the MSA area of Williamsport, PA, for instance, has a loan limit of $294,515. A dual-unit in the same MSA, however, has an increased loan limit of $377,075. Higher still is the three-unit loan limit of $455,800. Finally, if you are shopping for a four-unit property, you could potentially be approved for a mortgage of up to $566,425.
Minimum requirements
One of the reasons FHA secured loans are so attractive is that they have relatively relaxed approval criteria. There are four standard requirements for any loan backed by the FHA:
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• 3.5 percent down payment
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• Minimum credit score of 500 - 580
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• Down payments can be gifted to the borrower from a family member
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• Debt-to-income ratio
Although there are only four basic minimum requirements for an FHA-backed loan, the approval process allows for some mitigating situations to help you qualify for a loan even if you do not meet every specific requirement.To determine if you qualify for an FHA-backed loan, it is suggested that you talk to an expert in the field, like a mortgage broker. A good mortgage broker will be able to help you and your family determine if you qualify right away, or if your situation needs a bit of work or additional documentation before you apply.
Term
The term (or duration) of FHA loans is much the same as terms for other types of loans. Borrowers can receive adjustable mortgage rates (ARMS), or they can elect for a fixed-rate loan paid back over the course of15or 30 years. As with any property loan, a fixed interest rate will be fixed for the entire duration of the loan. In contrast, an adjustable percentage rate might be low at first, but after a period of three or five or seven years, the rate will increase. Sometimes the increase will be considerable.
Home appraisal and inspection
When it comes to home appraisal inspections, FHA requirements can be stringent. The government is guaranteeing the funds, so it is understandable the need to ensure the property meets or exceeds the value of the loan and is of sound condition.To accomplish this, during the appraisal, the appraiser will assess the value of the home. However, the appraiser will also note problems within the property that must be fixed. These problems can be as simple as peeling paint, or they can be serious safety problems such as loose handrails or mold or rotten siding. Because FHA-backed proceeds are secured by the government, it is the responsibility ofthe parties involved to then fix any noted problems prior to closing. If the problems are not fixed, the loan will not be approved.Although conventional loans also do require an appraisal, it is not as stringent in its requirements, thus a buyer should actually feel more comfortable about the FHA process, knowing that unless a house is of high quality, it will never be approved for a loan.
Points and fees
As with any loan, a borrower can pay points on the loan. Each point equals one percent of the loan, and paying points has a positive effect on the interest rate.
Closing Costs
FHA rules allow sellers to pay up to six percent of the closing costs. Additionally, some of the closing costs can be financed. FHA does prohibit closing costs from being considered as part of the down payment.
Some things to consider
Although there are many upsides to getting a loan backed by the FHA, one downside does exist, and this involves insurance. In both conventional loans and FHA loans, mortgage insurance is required when the down payment is less than 20 percent of the purchase price. Such insurance protects the loan issuer against possible default, and the cost for this insurance is added to the monthly loan payment.In a conventional loan, once the borrower has paid enough payments to acquire 20 percent or more in equity, the insurance can usually be removed from the monthly payment. In an FHA loan, however, it remains a permanent part of the monthly payment. Even when enough of the loan has been paid to create 20 or 50 or even 90 percent in equity, the original stipulations outlined in the home loan papers cannot be changed.
Williamsport mortgage broker Principle Home Mortgage specializes in helping their clients maneuver through each step of the mortgage process. To learn more about FHA loans, or any other type of mortgage – contact them today.
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