In a housing market inundated with foreclosures and stringent lending standards, cash-strapped borrowers welcome flexible financing options. The Federal Housing Administration and Fannie Mae have created programs to improve mortgage access. One way in which both programs achieve this is through liberal guidelines regarding buyer closing costs. Each program has merits and drawbacks which limit the borrower and property financed.
As an agency within the Department of Housing and Urban Development, the FHA adheres to HUD's standards for property eligibility. The FHA insures loans funded by approved lenders, reimbursing their losses when borrowers fail to pay. HomePath lenders do not rely on a government mortgage insurance guarantee, but instead rely on Fannie Mae's knowledge of the property to ensure the home meets conventional standards for collateral. HomePath loans are limited to homes owned by Fannie Mae, a government-sponsored enterprise which sets the standards for a majority of lending institutions.
HomePath allows you to bypass appraisal expenses. Fannie Mae appraises homes before taking ownership of them, so no lender-requested appraisal is needed. The FHA requires a thorough interior and exterior inspection of the home and possibly a re-inspection of lender-required repairs. An FHA appraisal fee may not exceed the "customary and reasonable" cost of an appraisal for its market or location. The fee typically ranges from $375 to $450 for a single-family home. Two- to four-unit homes, re-inspections and rental income analyses add about $100 to the cost.
The borrower owes a minimum down payment at closing. HomePath requires only 3 percent of the sale price and the FHA requires 3.5 percent as down payment. The FHA lender may require a higher down payment if the loan presents an increased risk. For example, a borrower with a credit score between 500 and 579 may need at least 10 percent down. Both HomePath and the FHA allow sellers to contribute up to 6 percent of the sale price towards the buyer's closing costs, but neither program allows a seller to help with the down payment.
The FHA charges an upfront mortgage insurance premium at closing. The one-time fee equals 1.75 percent of the loan amount. The FHA also charges an annual mortgage insurance premium, which equals 1.35 percent of the loan amount for most loans as of April 1, 2013. The lender collects prepaid mortgage insurance for the month in which you close, as well as a few months' worth of the premium at closing. In the event you miss future payments, your lender uses the payments made at closing as reserves to pay the FHA's premium. HomePath mortgages, however, require no mortgage insurance for owner-occupants or investors.
- FHA.com: FHA Seller Concession Rules and Possible Changes
- HomePath.com: Making it Easier to Finance Your Home
- PCM Wholesale: HomePath Guidelines
- Bankrate.com: Closing Costs: State Ranked
- Bankrate.com: HomePath Loans Save on Foreclosures
- HUD: Mortgagee Letter 2012-04: Single Family Mortgage Insurance: Annual and Up-Front Mortgage Insurance Premium – Changes
- HUD: Mortgagee Letter 2013-04: Revision of Federal Housing Administration (FHA) Policies Concerning Cancellation of the Annual Mortgage Insurance Premium (MIP) and Increase to the Annual MIP
- HUD: Mortgagee Letter 2009-28: Appraiser Independence
- HUD: Handbook 4155.1: Borrower, Coborrower and Cosigner Eligibility Requirements
Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.