Understanding the advantages and disadvantages of FHA mortgage loans.

The New Agent Blog strives to provide the education and resources that new agents need when they begin their real estate career.  In an effort to achieve this educational purpose, expert professionals from other real-estate related industries are invited to share their knowledge on specific topics and issues.  Michael Davis is the Assistant Vice President, Mortgage Originator with Genesee Regional Bank in New York, and has been in the mortgage industry for over 16 years and brings knowledge and experience to all aspects of the mortgage process.  For further clarification or education on this or any other mortgage topic, he can be reached at MJDavis@grbbank.com.

When helping your clients purchase a house, there are many mortgages to choose from.  This week’s mortgage topic: FHA mortgages.

What is an FHA Mortgage?  

FHA stands for the Federal Housing Authority.  An FHA mortgage is backed by the government, which means the lender will still get paid in the case of customer default.  The interest-rates are very aggressive for this type of mortgage.  You do not need to be a first time homebuyer to obtain an FHA mortgage, however you cannot have two FHA mortgages at the same time, except for certain circumstances.  Finally, another great advantage of FHA mortgages is that you are allowed for 100% of your down payment and closing costs to come from a gift from a relative.

Although FHA mortgages have many advantages, one of the primary disadvantages is that the monthly mortgage insurance is a bit higher than some other products.

What is the Required Down Payment?

One of the biggest draws for people applying for an FHA mortgage is the low down payment.  FHA mortgages require a down payment of 3.5%, which is lower than a conventional mortgage.  This helps in keeping the buyer’s closing costs low and avoid having to pay as much out-of-pocket to actually purchase the home.

Can the Buyer Get Seller Concessions?

For buyers who are looking for extra assistance with paying their closing costs, FHA mortgages allow for the seller of a transaction to pay up to 6% of the purchase price towards the buyer’s closing costs.  Many other loan types only allow 3% seller concessions, and with a down payment as low as 3.5%, a buyer who has negotiated 6% seller concessions will pay minimal closing costs to purchase the home.

Always have your lender run a few different mortgage scenarios to help you determine which is best for you and your financial situation.  However, for those with limited funds, often times FHA is the way to go!