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FHA loans offer first-timers options

Are you looking at a fixer-upper? There’s help available to pay for needed repairs.

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By Jessica Heffner, Staff Writer 12:33 AM Sunday, April 19, 2009

New incentives are getting more home buyers into the market, and the new king of first-time mortgages is the FHA loan.

While interest rates and qualifications for this retro-loan are low, there are some things to be aware of before you sign on the dotted line.

First-time buyers

The new $8,000 federal tax incentive to get first-timers into the housing market has so far been working its magic.

First-time buyers bought more than half of the existing homes sold in February, according to the latest report by the National Association of Realtors. That helped add to the 5.1 percent increase in sales from the month earlier.

Existing home sales in February rose to 4.72 million units in the biggest monthly jump since July 2003, according to the report.

What is an FHA loan?

Much of the spurt in sales to first-time buyers is due to the Department of Housing and Urban Development lifting the cap for FHA loans, raising the limit on the mortgages it would insure from $362,790 to $729,750 in some parts of the country.

FHA loans, created in 1934, fell out of favor after 2000 as adjustable-rate mortgages with low monthly payments began to surface.

For many buyers, FHA — mortgages administered and insured by the Federal Housing Administration — is the best way to get a mortgage as it only requires a 3.5 percent down payment and qualifies borrowers with lower credit scores, said Adrian Breen, market president for the Butler County market for First Financial.

“It might take a little longer to underwrite, but otherwise there is no real disadvantage of getting an FHA loan,” Breen said.

FHA limitations

But there are limitations. For instance, the FHA will not always approve loans on homes that need a lot of costly repairs. This is a problem for first-timers because many are interested in rehab properties because of their low-cost, said Susan Crank, a broker with Innovative Real Estate Solutions in Middletown.

“Many rehab properties do not pass FHA inspections,” she said. “First-time home buyers don’t want to buy a home when they are going to have to put so much money into it just to get a loan.”

The key is seeing if there is grant money available to fix the home, she said.

For instance, many municipalities offer grant funds for blighted properties or those that need a lot of repair work.

Crank said she would like lenders and municipalities to promote available options for bank-owned and HUD houses so more first-time buyers could take advantage.

“It’s sort of a Catch-22 because if they want to get people into these homes they are going to have to make sure people have more information on how to go about it,” she said.

There are some additional options available, Breen said.

There is an FHA program called a 203k that may help with repairs. And if the property is owned by U.S. Housing and Urban Development — a HUD home — sometimes the agency will allow the buyer to assume the previous mortgage, he said.

Other times, whether it be an FHA loan or conventional loan, a bank will put funds into an escrow account that can be held until the repairs are made.

“Say you need a new roof,” Breen said. “The customer goes to a roofing agent, gets an estimate and then the roofing agent verifies the funds are in escrow to complete the work. After it’s done, the bank then can release the funds to the repairman directly.”

Know what you need

The key to a successful mortgage is meeting with a mortgage loan originator and discussing your needs as well as your current financial situation. Most loan originators are paid on commission, meaning they do not get paid unless they negotiate a successful loan, Breen said.

“They waste a lot of time if the loan does not get approved or closed,” he said.

A lot of criteria is considered when choosing a loan, such as gross income, other debt such as credit cards or student and car loans, the amount in your savings account as well as how long you plan to stay in the home, Breen said.

For the most part, your total debt including the mortgage should not exceed 30 percent of your gross income, he said.

For more information, contact your lender or apply at www.hud.gov.

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