Can anyone please explain how it works? Every explanation I find online seems so complicated and/or just wants to direct me to a lender. I just want to understand, not waste mine and a lender’s time :’)
Let’s say a potential house you’re interested in is listed for $200,000, if a hypothetical helps explain.
In: 8
Not a lender, am a realtor. Here’s what I tell my buyers;
Don’t confuse FHA and “first time home buyer loan.” They are not the same thing. FHA is a program that is popular with first time home buyers as it allows for a 3.5% down payment and good interest rates. Down payment and affordability are generally a home buyers biggest obstacles and FHA is generous in those regards. Relatively speaking any way.
There are specific first time buyer programs but they may run through a local housing authority and not be offered by all banks/credit unions/mortgage companies, etc. For example I’m in Rhode Island and we have Rhode Island Housing and they have programs that they only offer to people who have never owned a home. In some cases I believe they even have some only available to people whose parents never bought a home either. These are pretty specific and, sorry to say, your only way to learn about these is to contact a lender in your area.
The drawback of these loans is they have some additional requirements borrowers and/or their properties must meet. The most common example is a property being purchased with an FHA loan must be in a certain condition, and one thing they typically won’t allow is chipping paint (lead hazard.) They will also not allow missing handrails on stairs/platforms that exceed 30 inches (I think) in height.
How do they work…you meet with a lender, they approve you, and then you find a realtor and go buy a house.
FHA is a govt agency that protects lenders by supporting first time buyers. FTB are considered a higher risk by lenders. Lenders respond to risk by charging higher interest and more down payment, if they are willing to lend to FTB at all. Banks prefer low risk customers.
The fha protects lenders and buyers because the govt believes that homeownership is good for communities.
The fha does not lend money. Rather it makes it easier for these higher risk borrowers to get loans for homes by asking banks to create loans with easier/accessible loan requirements and agreeing to guarantee the banks won’t lose if the borrower defaults.
They also protect borrowers and lenders by requiring that the home meet certain standards and by encouraging programs in areas impacted by economic downturns and rural areas.
FHA backed loans are not always the best loans, but for some it’s the best way to purchase your first home.
Money comes from the lender which is why you are directed back to the banks. They have many types of loans or products. Each bank defines and manages risk differently so you have to seek different lenders to search different products, just like retail. There’s no one “fha loan”.
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