The final step of the FHA buying process is closing. This is where you’ll sign all the paperwork, pay your closing costs, and get the keys to your new home. First however, you’ll need to learn more about the FHA program itself and how it benefits you as a borrower.
The FHA Program
The Federal Housing Administration, commonly referred to as FHA, has been fulfilling its goal of backing residential mortgages since Congress created the program in 1934. Since its inception, FHA has insured more than 47 million properties, making it the largest mortgage insurer in the world.
FHA programs make it easier for buyers—particularly first-time homebuyers—to purchase a home by easing the qualification process for approval and by allowing the borrower to make a down payment of as little as 3.5% of the value of the loan. Lenders are eager to issue FHA-backed mortgages because the loans are fully guaranteed by the federal government in the event of a borrower default.
How the FHA Program Helps Borrowers
One of the principal ways the FHA program helps borrowers is by reducing the minimum credit score necessary to be approved for a loan. The Department of Housing and Urban Development (HUD), which implements FHA programs, has a minimum score requirement of 580 for borrowers looking to take advantage of the 3.5% down-payment option. Most lenders issuing a conventional (or non-FHA) mortgage require the buyer to have a minimum score of anywhere between 620 to 650 to qualify.
Another benefit of FHA is the ability to have the entire down payment gifted to you from someone else, as long as both the gift and the giver meet FHA requirements. With conventional mortgages, lenders typically set a limit on the amount of gift money you can put toward the down payment—if a gift is allowed at all.
Finally, FHA loans are assumable. This means that you can transfer the terms of your FHA loan to a new borrower in the event you want to sell your home in the future. The buyer will have to meet the same FHA requirements to be approved for the loan, but they can assume the terms and conditions that were put in place at the time the original FHA loan was issued. This can be particularly helpful if mortgage interest rates have risen since the original purchase. Along with the rest of the terms, the new borrower can assume the lower interest rate when buying the home. The net effect is that the home is easier to sell for the original borrower.
Who Qualifies for FHA Loans?
While the FHA program is rightly seen as expanding access to homeownership, borrowers must still meet a host of qualifications and conditions. Here are just a handful:
The borrower must be 18 years of age
The property being purchased must be the primary residence of the borrower
A credit score of between 500 and 579 is required for a 10% down payment
A credit score higher than 580 is required for a 3.5% down payment
Appraisals must be conducted by FHA-approved appraisers
Mortgages must be issued by FHA-approved lenders
The borrower must have at least two years of employment history
The borrower must have a debt-to-income ratio that’s no higher than 50%
Other terms and conditions apply, of course, including homeowners and mortgage insurance requirements, but since each borrower has a different set of circumstances, each approval and closing is unique.
The FHA Closing Process
Before the closing process even starts—and before you even begin searching for a home—an experienced real estate attorney should be hired. A real estate attorney can help guide you through the process, from contract to closing. Once a contract is signed, there isn’t much an attorney can do if the terms are unfavorable to the buyer. For example, when you make an offer, your real estate attorney should hold the “earnest money” on your behalf, just in case the deal goes bad.
After you’ve found a home, made an offer, and it’s been accepted, that’s when the real work begins for the real estate attorney.
First, the house must appraise for the purchase price (or higher). With the appraisal out of the way, your closing attorney will then perform a title search.
Marketable title is required, because it assures that the property you’re trying to buy isn’t encumbered with any outstanding municipal liens, judgements, or taxes. FHA guidelines require all title issues or disputes to be cleared up before settlement, so that the new mortgage is in first lien position. This allows the government to insure your loan.
Prior to closing, you’ll receive a closing cost disclosure, which your attorney can review with you. This will include all of your closing costs and the final sum you’ll need to bring with you to the closing. Closing costs typically include lender fees, property tax escrows (if any), homeowners insurance, escrow fees, prepaid interest (if any) title insurance, survey, credit report, and other loan-related costs. Since each transaction is unique, there may be additional fees beyond those mentioned here.
When it comes time for closing, settlement will typically take place in one of three places: the title insurance company, the lender’s office, or your real estate attorney’s office.
What To Expect At Closing
The closing itself can take anywhere from one to two hours, depending on the preparedness of the buyer and seller and the loose ends that need to be tied up. Typically, the closing agent will be present, along with the real estate agents and real estate attorneys for the buyer and seller.
There is always a lot of paperwork to sign, but the closing boils down to four primary components:
Reviewing and signing all loan documents
The seller delivering the deed and keys
The buyer delivering the sale proceeds to the seller
The closing agent (attorney) disbursing the money, recording the deed, returning the loan documents to the lender and issuing the title insurance policy to the buyer
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What to Do Now
If you are planning to buy a home using a FHA loan or buying a home directly from FHA, then you should seek the help of an experienced real estate attorney to ensure that your rights are protected.
Get A Free Case Evaluation – Call (954) 986-6446
Having a real estate attorney involved from the beginning of the buying process can save a lot of time and money in the long run. The best part is using a real estate attorney to close your transaction doesn’t cost more than using a title company for these services.
Contact Bruce R. Jacobs to find out how he can help you. You can reach him by phone at (954) 986-6446 or by e-mail through this web site to schedule an appointment and learn more about your rights. He offers a free initial consultation.