If you are considering your first home purchase but are uncertain if your credit is up to snuff for a mortgage, FHA financing is one of several popular mortgage options and may be right for you.
What Is FHA Financing?
In order to encourage home ownership, the Federal Housing Administration offers guarantees on mortgages for properties and borrowers who meet their criteria. While the FHA does not offer direct loans to consumers, the administration will guarantee loans from approved lending institutions. This guarantee means that lending institutions are ensured payment, even if the mortgagee defaults on the loan. Because of this guarantee, these lending institutions are willing to work with applicants who may otherwise be considered risky borrowers.
Who Can Qualify for FHA Financing?
Most of the FHA's borrowers are first-time home buyers with a less than perfect credit history. The program allows applicants with credit scores of 500 to 579 to purchase a home by making a 10 percent down payment. With a credit score higher than 580, applicants must make a 3.5 percent down payment. The lower down payment is a major perk for home buyers and greatly reduces the barriers to homeownership for many. The down payment can be made from the buyer's savings, gifts from family members, or a grant from a state or local down-payment assistance program. When it comes from an outside source, the down-payment assistance must be a gift or a grant, not an additional loan.
What Type of Home Can FHA Financing Purchase?
The FHA will guarantee loans for a wide variety of homes. Whether the home is a condo, multi-family, detached or semi-detached single-family, the FHA's main concern is that the property meets the administration's minimum property standards. The home must be structurally sound with properly working mechanical systems. The plumbing, electricity, septic, and HVAC systems must be in proper working order in your Randolph Market home in order to qualify. This ensures that the new homeowner will not be faced with an uninhabitable property or major repair costs in the aftermath of the home purchase.
An FHA-certified home inspector will complete the initial home inspection to ensure that the property meets the minimum structural requirements. An application may be denied if:
- The home has issues that may affect the health of the homeowner such as problems with groundwater, plumbing, septic, or soil contamination.
- The home's heating system shows signs of excessive age that could lead to imminent failure.
- The home's electrical system has frayed wires or inadequate power to support the resident's electrical usage.
- The home shows signs of structural damage which may include damage from infestation, defective construction, the use of hazardous materials, signs of mold, and any signs of issues with water drainage or leaks.
Homebuyers should be aware that the FHA inspector is not concerned with cosmetic issues. The purple-flowered wallpaper or lime green countertops in the kitchen may be unsightly but ultimately do not affect the habitability of the home. Homes that fail inspection for an FHA loan may still be eligible for the FHA's 203 (k) loan program which is perfect for your fixer-upper project. You can use this loan to make substantial changes to the home as long as part of the original foundation remains. In these cases, the inspector is more concerned with the property's condition after repairs than at the time of purchase.
Ted Guarnero, REALTOR® is a full-time real estate agent with over 1000 homes sold and $400 million in sales. Working with Compass real estate offering professional and effective real estate services to help you succeed in the local real estate market. Visit www.seeChicagorealestate.com for information on downtown Chicago real estate and to get in touch with an expert in the Chicago real estate market. Before you hire your next Realtor call Ted Guarnero 855-See-Chicago, it's on the House !