May 29, 2024
Many first-time house hunters are confused by mortgage loan industry jargon, real estate acronyms, and industry terms used incorrectly. How do you separate the facts from the fiction when learning new terms along the way to closing day?
There are many issues. Calling an appraisal an “inspection” is one good example (see below.)
There are also industry terms that sound familiar but don’t mean what some think they mean. The whole concept of mortgage insurance is a great example (see below). We examine some of the most common of these below.
Owner-Occupied Homes Are Not Investment Properties
An FHA purchase or refinance loan is meant for owner-occupiers. These are the buyers who want the FHA loan to be used for the property they intend to live in. An FHA purchase or refinance loan cannot be used for an investment property.
What’s an investment property? FHA loan rules describe it in part as a house the borrower purchases but does not live in as the primary residence.
FHA Mortgage Insurance Is Not Homeowner’s Insurance
FHA mortgage insurance premiums are required to protect the lender in case the borrower defaults on the loan.
Mortgage insurance is not the same as homeowner’s insurance, a consumer tool meant to protect the borrower in case the home is damaged or destroyed.
FHA Appraisals Are Not The Same As Home Inspections
The lender requires an appraisal. It is the tool used to make certain the house meets minimum standards. It is also a tool used to establish the property’s fair market value and is NOT the same as a home inspection.
The home inspection is more detailed and is considered a tool for the borrower to learn about the home’s condition and possible issues that may be waiting after closing day.
FHA Purchase Loan, FHA Rehab Loans
An FHA purchase loan is used to buy a house. The house must pass the FHA appraisal process or be modified to do so as a condition of loan approval. You can’t buy a fixer-upper with an FHA 203(b) purchase loan; a different type of mortgage (the FHA rehab loan) is offered for this purpose.
A rehab or renovation loan is the one you need to buy and renovate a home that cannot pass the appraisal process until after the renovation work is complete.
Cash Back At Closing Time
FHA loans have rules (in HUD 4000.1) that do not allow you to take cash back at closing time in typical cases, at least for purchase loans.
One example? A borrower cannot apply for more mortgage than is needed to buy the home and take the excess cash at closing time. This is not allowed.
Typically, an FHA borrower can get cash on closing day only if that cash is a refund for items paid for but later financed into the loan amount.
The FHA upfront mortgage insurance premium is an excellent example if this. You can pay it in cash at closing or finance it into the loan. If you pay up front but change your mind before closing day, a refund would be technically due if the lender agrees to change the option.
You won’t get cash at closing time without needing a refund when involved in an FHA 203(b) purchase loan, FHA 203(k) rehab, or FHA single-close construction loans.
You may receive cash at closing during an FHA cash-out refinance loan, but the rules governing this transaction differ from FHA loans used to buy existing properties without refinancing.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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