FHA is an acronym that stands for Federal Housing Administration, and they are home loans that are backed by the Federal Government. When we look at loan products, there are 3 primary products you will come across as a Notary Signing Agent: FHA (Federal Housing Administration), VA (Veterans Affairs), and your standard Conventional Loan Product. Both the FHA and VA loans are backed by the federal government which means in the event of a default (or non-payment of the loan) the US government covers the lender up to a percentage of the loss if the borrower cannot repay the debt. Conventional loans are not insured by the US government and pose much more risk to the lender.
To help the reader understand some of the terms in the article below, LTV (Loan to Value Ratio) will be discussed. What LTV means, is it’s the amount of money owed against your loan amount or appraised value, whichever is greater. For example, if you take out a loan for $200,000 and you pay off the loan by $40,000, your loan to value ratio is 80%.
Advantages of an FHA Loan
Many first-time homebuyers will take advantage of a FHA loan because they can qualify for this product with a low credit score, high debt to income ratio, and low-down payment. They also offer buyers the option to participate in a downpayment assistance program as well. To put this into perspective, imagine buying your first home, most people will not have the cash on hand to put a 20% down payment on their home as that can be a substantial amount of money when a home is being purchased for several hundred thousand dollars. These loans are a great product for individuals venturing into owning a home for the first time so they can build equity by paying down their loan and the property value rising over time. Many people will then transition to a conventional loan when they purchase a new property as they can use their equity for a larger down payment on a new home purchase and meet that 80% Loan to Value Ratio on a Conventional Loan Product so Private Mortgage Insurance does not need to be paid as the PMI sticks on a FHA loan regardless of the LTV amount. But FHA loans are not just for first time homebuyers, anyone may apply for this kind of loan however, they are popular when buying a home for the first time because of the loose credit profile requirements.
The lender’s advantage to a borrower taking out an FHA loan is they take on less risk with these loans because the Federal Government backs them and, in the event, there is a default as financial loss issues will be minimal.
Disadvantages of an FHA Loan
There are a few drawbacks when purchasing a home with this product. Yes, you do have great advantages with the low down payments and a subpar income, asset, or credit profile. However typically with this product your interest rate will be higher when compared to a Conventional Loan. This will greatly impact the amount of money you pay in interest over the life of the loan. PMI (Private Mortgage Insurance) sticks on your payment permanently and the only way it will be removed is if the home is refinanced under a different loan product (Conventional or VA) or the home is sold. Typically with a Conventional loan, the private mortgage insurance does not need to be paid if the LTV (Loan to Value Ration) is 80% or less at the time of purchase, refinance, or paying down your existing loan. Individuals making an offer on a home that will be using an FHA loan can be at a disadvantage when competing with other buyers in a hot sellers’ market. Think of yourself as a seller getting multiple offers on your home, wouldn’t you want your close of escrow to go as seamless as possible? Individuals with a lower credit profile have a much higher risk of being declined by their lender in the closing process and the seller wants to run the least amount of risk of their transaction bottoming out and having to start all over again. Plus, there are more extensive property requirements and inspections the FHA requires on the property being purchased which can tack on a lot of extra time for the home to close. While the FHA loans has great benefits to the buyer and the lender, they don’t have many benefits to a seller in a hot sellers’ market.
How is this relative to the Notary Signing Agent.
All NSA’s should be aware of the loan products lenders offer as these will be the documents you will be showing up to the closing table with. The information communicated in this article does not contain any information you would need to communicate with the borrowers as that would be the responsibility of the lender. However, with any job or career that is pursued, the more knowledge you have, whether it is relative to your specific job duty or not, will give you more confidence when executing your role as a NSA. For instance, having the knowledge that an FHA product allows borrowers to participate in a down payment assistance program would give you the reason as to why there is a 2nd Deed of Trust/Mortgage and Note, in a closing package. Knowledge builds confidence, and as a self-employed NSA, you are responsible for your own training and knowledge base to enhance your career, so learn as much as you possibly can!
Written by Travis Myers
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