Avoiding Confusion with Your FHA Home Loan
June 1, 2024
Are you a first-time house hunter? Many new to this process are confused by industry jargon, especially terms used incorrectly.
Calling an appraisal an “inspection” is one good example. There are also industry terms that sound like something they are not. Mortgage insurance is a great example. We examine some of the most common of these below.
Owner-Occupied Homes vs. Investment Properties
An FHA loan is intended for those who want to buy a house they will live in. It cannot be used for an investment property, which is a house the borrower purchases but does not live in, typically renting it out to others.
FHA Mortgage Insurance vs. Homeowner’s Insurance
FHA mortgage insurance premiums are required to protect the lender in case the borrower defaults on the loan.
This insurance is not the same as homeowner’s insurance, which is designed to protect the borrower against loss should the home or other covered property be damaged, destroyed, etc.
FHA Appraisals vs. Home Inspections
The lender uses the appraisal tool to ensure the house meets minimum standards and determine its fair market value. It is not the same procedure as the more detailed home inspection, which is a tool for the borrower to determine the home's true condition.
FHA Purchase Loan vs. Rehab Loan
An FHA purchase loan is used to buy a house that can pass the FHA appraisal process or be modified to do so as a condition of loan approval.
A rehab or renovation loan is used to buy and renovate a home that cannot pass the appraisal process until after the renovation work is complete. These are two separate FHA loan options.
Cash Back at Closing Time vs. Refunds at Closing Time
FHA loans prohibit getting cash back at closing time in typical cases. That means a borrower cannot apply for more mortgage than is needed to buy the home and pocket the difference.
The borrower can get cash on closing day only if that is a refund for money paid upfront for an expense later financed into the loan amount.
You won’t get cash for purchase, rehab, or FHA construction loans. You may receive cash at closing during an FHA cash-out refinance loan, but the rules governing this transaction differ from FHA purchase loans.
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When Do You Need a Cosigner?
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Calling an appraisal an “inspection” is one good example. There are also industry terms that sound like something they are not. Mortgage insurance is a great example. We examine some of the most common of these below.
Owner-Occupied Homes vs. Investment Properties
An FHA loan is intended for those who want to buy a house they will live in. It cannot be used for an investment property, which is a house the borrower purchases but does not live in, typically renting it out to others.
FHA Mortgage Insurance vs. Homeowner’s Insurance
FHA mortgage insurance premiums are required to protect the lender in case the borrower defaults on the loan.
This insurance is not the same as homeowner’s insurance, which is designed to protect the borrower against loss should the home or other covered property be damaged, destroyed, etc.
FHA Appraisals vs. Home Inspections
The lender uses the appraisal tool to ensure the house meets minimum standards and determine its fair market value. It is not the same procedure as the more detailed home inspection, which is a tool for the borrower to determine the home's true condition.
FHA Purchase Loan vs. Rehab Loan
An FHA purchase loan is used to buy a house that can pass the FHA appraisal process or be modified to do so as a condition of loan approval.
A rehab or renovation loan is used to buy and renovate a home that cannot pass the appraisal process until after the renovation work is complete. These are two separate FHA loan options.
Cash Back at Closing Time vs. Refunds at Closing Time
FHA loans prohibit getting cash back at closing time in typical cases. That means a borrower cannot apply for more mortgage than is needed to buy the home and pocket the difference.
The borrower can get cash on closing day only if that is a refund for money paid upfront for an expense later financed into the loan amount.
You won’t get cash for purchase, rehab, or FHA construction loans. You may receive cash at closing during an FHA cash-out refinance loan, but the rules governing this transaction differ from FHA purchase loans.
------------------------------
RELATED VIDEOS:
Here's the Scoop on Conventional Loans
When Do You Need a Cosigner?
Analyzing Your Debt Ratio
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