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gage Insurance

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Housing and Urban Development

Office of Single Family Housing
Becoming a Homeowner 

Many people in the United States dream of owning their own homes,

but few are able to pay cash for them. Many individuals and families whocould not otherwise afford to own a home become homeowners with thehelp of the Federal Housing Administration (FHA) mortgage insuranceprograms. 

FHA is a part of the U.S. Department

of Housing and Urban Development(HUD). One of the chief purposes ofFHA is to help people obtain financing tobuy their homes. 

This booklet can help homebuyers

understand how they can make use ofFHA mortgage insurance programs. Itexplains:• How FHA mortgage insurance works• Who can use FHA mortgage insurance• How to shop for a HUD-approved

lender 

• How to apply for an FHA-insured

mortgage loan

• What restrictions apply to FHA-insured mortgage loans

Buying a home is the biggest single purchase that most people will

make in their lifetimes. Most people borrow money through a mortgageloan to buy a home. Some people reduce the amount of money they borrow by making a large downpayment on the loan to buy a home. Personswho do not have money for a large downpayment may need the help ofan FHA-insured mortgage to get a loan.

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Mortgage—A legal document that promises a property to the

lender as security for payment of a debt. See page 5 formore information about mortgage loans.

Downpayment—The part of the purchase price that a buyer

pays in cash and is not included in the mortgage.
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grams help low- and moderate-income

nancing to buy homes or refinance their

 mortgages. FHA mortgage insurance

a homebuyer to make a low downpay

nd get a mortgage loan for the balance of

chase price. 

 mortgage loan is made by a HUD

ed lender, such as a bank, mortgage com

r credit union. FHA insures the mortgage

uyer defaults on the loan, or fails to

rect loans to people who want to buy,

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nancing a mortgage for a home you

provements, you may qualify for an

as a satisfactory credit record, enough

ent steady income to make monthly

ved for an FHA-insured mortgage. There

ain income level required, although indi

ited by law. Generally, homebuyers must

an FHA-insured mortgage loan. The pro

To find out if you qualify for an FHA-insured mortgage loan, you

should visit a HUD-approved housing counseling agency or a HUDapproved lender, such as a bank, credit union, or mortgage company. 

The housing counselor or lender will look at certain information about

your income and spending to determine if you qualify. 

Federal law prohibits housing discrimination based on your race, color,

national origin, religion, sex, family status, or disability.

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Whether you are buying a home, making home improvements, or refinancing your current mortgage, you should work with a HUD-approved

lender—such as a bank, a mortgage company, or a credit union—to applyfor a mortgage loan.Once your loan isapproved, FHA willinsure the loan and paythe lender if you defaulton the mortgage.Because the lender isprotected by this insurance, the lender cangive you better termson your loan.

A lower downpayment—Some lenders

require borrowers to pay 10 percent or more of the price of a home incash as a downpayment. With FHA-insured mortgages, your downpayment can be as low as 3 percent. The lender will likely require you toprove that you have enough money for the loan downpayment. 

Use of cash gifts toward downpayment—With an FHA-insured

mortgage, under certain circumstances you can use a gift from a relative, alocal nonprofit organization, or a government agency for all or part of thedownpayment and closing costs. 

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ling and referral line toll-free at

HUD website at www.hud.gov. 

er, search online at

find lending institutions in the

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vailable in urban and rural areas for: 

ur units

rtgages are available for reverse mort

Equity Conversion Mortgage.

s serve low- and moderate-income peo

 dollar value of the mortgage loan.

nd vary by city and state. Check with a

UD’s website, www.hud.gov.

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f the most important purchases you will

mmends you visit a HUD-approved

 a counselor can help you compare loans

ou can find counseling agencies by call

 and referral line toll-free at 1-800-569-

e at www.hud.gov. You can also find

UD website.

buying experience can be easier when

an. To become pre-qualified, you will

 application. When a lender pre-quali

maximum amount of money you can

 information, you can spend your time

ford rather than ones that are too expen

fee for pre-qualification, so you should

or more lenders.

nsured mortgage loan the same way you

mpare prices and features. The cost of

 one lender to another, so compare these

 lenders:

• Interest rate• Discount points• Closing costs and other fees• Annual percentage rate

FHA/HUD does not set the amounts for the above factors. You can

negotiate with the lender and come to agreement on the interest rate,points, and most processing fees. Interest Rate 

You can negotiate with your lender on the interest rate that you will

pay for your mortgage. Interest rates fluctuate daily, depending on conditions in the mortgage market. FHA recommends that you check with several mortgage lenders to make sure you get the best interest rate available. Discount Points

Lenders can charge you discount points when the interest rate is lower

than the yield required by investors who buy mortgage securities. A discount point is $1 for every $100 of the mortgage loan amount. The number of points charged varies in different places at different times andamong different lenders. Discount points for an FHA-insured mortgagemay be paid by you as the homebuyer, by the homebuilder, or by the person selling the house. Closing Costs and Prepaid Items 

When your loan is finalized, you will have to pay closing costs.

Closing costs are costs in addition to the price of the property that arepaid when you close your loan to cover the transfer of ownership. 

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n is made up of two parts: 

prin

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st. Principal is the amount of money borrowed to buy your

home. Interest is the amount paid for the privilege of borrowing the money and paying it back later, usually over 30 years.

When the borrower pays the mortgage each month, some ofthe amount goes toward paying the principal and some towardinterest. Equity is an owner’s financial interest in a property.

It is the difference between the amount still owed on the mortgage loan and the fair market value of the property.

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Annual Percentage Rate 

The Truth in Lending Act requires the lender to tell you the annual

percentage rate (APR) charged on your home mortgage. The annual percentage rate is calculated by adding the interest rate, the discount points,the initial service charge, the premium paid to insure the mortgage, and

certain other charges collected by the lender. The APR is not the sameas the mortgage loan interest rate. 

The Cost of FHA Mortgage Insurance 

When you get a mortgage loan insured by FHA, you have to pay an

up-front insurance premium, which can be included in the loan you getthrough a lender. You will also have to pay a monthly insurance premiumthat is added to the regular mortgage payment. FHA uses the premiums topay the lender if you default on your mortgage. 

The Importance of Getting a Home Inspection 

Buying a home is one of the most important purchases you will make

in your lifetime, so you should be sure that the home you want to buy is ingood condition. A home inspection is an evaluation of a home’s conditionby a trained expert. During a home inspection, a qualified inspector takesan in-depth and impartial look at the property you plan to buy. Theinspector will:• Evaluate the physical condition: the structure, construction, and

mechanical systems. 

• Identify items that should be repaired or replaced. • Estimate the remaining useful life of the major systems (such as electrical, plumbing, heating, air conditioning), equipment, structure, and

finishes. After the inspection is complete, you will receive a written report of

the findings from the home inspector, usually within five to seven days.

FHA does not guarantee the value or condition of your future home,

and FHA does not perform home inspections. If you find problems withyour new home after closing, FHA cannot give or lend you money forrepairs, nor can it buy the home back from you.

ade up of the

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lender adminis

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r lender’s)

as well as certain of the prepaid items

eller, or shared between the borrower

terms of the sales contract. 

ts (property taxes, first annual premium

made at closing by the borrower that may

nd used by the lender to pay these bills as

is the amount that the state or locality,

piece of property based on the value.

losing are usually covered in your pre

l also include an amount to pay future

ocality. These tax rates vary by area and

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bines hazard insurance and lia

rance covers property damage

 and other similar events.

nd floods may or may not be

ce, and you should check with

termine if this is included in

ce coverage protects you

gence or inappropriate action

roperty damage.
or you, the buyer, to get an independent

member that an inspection is different

l be performed as part of the mortgage

pector to thoroughly examine the physi

e and give you the information you need

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on for yourself, your family, or others.

ble to help you. 

v

hensive information about homebuying,

making home improvements, and other

h and Spanish.

eling Agency Locator 

ved housing counseling agencies that pro

 nation. For a complete list of HUD

ll the HUD housing counseling referral

or visit the HUD website at www.hud.gov.

pproved lenders, including banks, mort

ns, is available on the HUD website at

877-8339)

developed by HUD are available from

by calling toll-free 1-800-767-7468 (TTY:

en 8:00 a.m. and 5:15 p.m. EST. Written

U.S. Department of Housing and Urban

Center, Room B-100, 451 Seventh Street,

 may fax requests to (202) 708-2313.