July 14, 2017
What is an FHA loan and how does it work? There are many differences between conventional and FHA mortgages, and those differences could mean significant savings depending on your home buying needs and goals.
What An FHA Loan Is Not
An FHA loan is a mortgage loan, first and foremost. It is intended to buy or refinance a property. An FHA “forward mortgage” or new home loan not intended to act as a personal loan, with cash back to the borrower at closing time.
FHA loan rules don’t permit the borrower to apply for a loan greater than the adjusted value of the property plus additional costs that may be rolled into the loan. While your FHA mortgage may be greater than the total adjusted value of the property, you aren’t allowed cash back on the transaction for a new purchase loan except for refunds.
An FHA loan is not a conventional mortgage. That is to say that FHA loans are guaranteed by the United States Government, protecting the lender against possible loan default and foreclosure and making it easier for the lender to justify giving a new loan to a borrower who may be considered “marginal” in terms of financial qualifications for a conventional loan. Conventional loans are not backed by the FHA or HUD.
What The FHA Does
The FHA guarantees a portion of your mortgage loan, working with the lender to prevent the lender from taking a total loss in the event of a foreclosure situation. The FHA certifies that your participating lender meets FHA loan program standards and observes FHA loan requirements.
The lender’s own standards may be higher than FHA minimums-this is permitted as long as lender standards comply with federal law. In some cases the FHA may be required to review a loan application for approval (depending on circumstances) but in other transactions the lender may have “unsupervised authority” granted from the FHA/HUD to process the loan.
What The FHA Does Not Do
The FHA does not lend money, set interest rates, or get involved in loan closing procedures. The way an FHA home loan works is similar to how conventional loans work. You will need to find a participating FHA lender who is willing to work with you once you have found a home you wish to buy. The principal and interest of your FHA home loan will be negotiated between you and the lender.
The lender will have you fill out FHA loan application forms, the same way a conventional lender would have you apply. You will authorize your lender to review your credit data, employment history, income, and other financial areas crucial to loan approval.
The lender will approve the loan assuming the borrower is financially qualified, and then the lender, borrower, and seller take the steps towards getting a closing date. You, the borrower, will be informed as to the specific expenses of your FHA loan in a closing disclosure form. All parties agree to which expenses related to the sale of the home are paid by the borrower, which (if any) are paid by the seller, and what is owed to the lender at closing time.
In all of this, you will deal with your participating FHA lender and not the FHA directly. If you have questions as to the specific steps in these procedures, discuss your concerns with your participating lender as no two financial institutions may do things the same way. If you need information about current APRs or other time-sensitive details for FHA home loans might be at the moment.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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