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 FHA loans:
Help
for home buyers shut-out by traditional guidelines!
When
one thinks about government sponsored mortgage programs, the first one
that generally comes to mind is the Federal Housing Administration, or
FHA. The FHA is an agency of the federal government. The FHA works with
mortgage lenders throughout the country to help many homebuyers secure
the financing that they need in order to have the house of their dreams.
The FHA is a division of HUD (Department of Housing and Urban
Development) and since both agencies have a long history of helping
individuals with homeownership, many first time buyers turn to them for
assistance.
One
of the basic functions of the FHA is to insure mortgage loans made to
individuals. The FHA serves as an insurance policy for lenders,
protecting them against losses incurred in the event the borrower stops
making his/her scheduled loan payments. FHA insurance often times makes
lenders more willing to work with an individual who does not completely
fit their credit standards. Lenders can also receive similar mortgage
insurance from private companies. The widespread use of mortgage
insurance has made 5% down payments common on home purchases.
But
what makes FHA insurance more attractive than many other privately
issued insurances is that borrowers are usually given more flexibility.
The average lender requires that an individual have a debt to income
ratio of 28/36 which means that no more than 28% of the borrower's gross
monthly income can go towards housing and no more than 36% of the
monthly income can towards monthly debt (including housing). FHA has
opted for a ratio of 29/41 instead. For those with a heavy debt load,
that extra five percent debt allowance (41% - 36%) could make the
difference when it comes to qualifying for a loan.
Down
payment requirements through FHA are often times lower as well. FHA only
requires that the borrower place under 5% down. The initial out of
pocket savings help many when they had been originally held back due to
a lack of readily available money. Another option is that FHA allows for
the Family Money Rule. This rule states that the money used for both
down payment and closing costs may come from a family member. FHA has
recently changed this rule to allow for 100% help from family members.
FHA
insured loans are also assumable loans. This can be an attractive
feature when it comes to selling your home. With an assumable loan, the
home buyer can just take over the payments on the loan instead of
obtaining a new mortgage loan. This can bypass a lot of paperwork and
may help you sell your house faster when the time comes to do so. If the
original mortgage was obtained in times of lower interest rates, a buyer
would find a below market interest rate loan a good opportunity. FHA
also has another paperwork saving advantage, a Streamline Refinancing
option. This is an ideal refinancing option for those who have been
locked into a high rate and now wish to refinance into a much lower one
with minimal paperwork.
FHA
allows a variety of loan programs, the most popular of which being a 30
or 15 year fixed rate loan or a one year adjustable rate mortgage (ARM)
loan. The FHA-insured ARM is an extremely attractive option for
first-time homebuyers. The interest rate on the loan is guaranteed never
to increase by more than 1% each year, and never more than 5% total.
Most ARM loans allow increases of 2% and 6% respectively. Borrowers
using the FHA ARM loan can also qualify based on the introductory
interest rate. Many lenders will require higher down payments to qualify
a borrower based on the introductory interest rate on a non FHA ARM
loan.
The
buy and fix-it program known as the 203(k) has become increasingly
popular as well. This program allows a homebuyer to borrow the money
needed to purchase the house and the money needed to make repairs to the
property with one loan. FHA also has very distinct loan programs set up
for all sorts of instances, including condominium mortgages, disaster
relief, rural area home mortgages and construction loans.
Insurance costs through FHA are often times more expensive than most
privately issued mortgage insurance. However, the money spent on this
fee pales when one considers the fact that it can open the door of
homeownership. Although there are no income restrictions on FHA-insured
loans, borrowers are limited to the amount they can borrow. Loan limits
are set according to the county in which the property resides, but are
usually high enough to cover most moderately priced homes in the area.
Since
the FHA is an agency aimed at helping the average individual it is
reassuring that they offer a variety of programs and services aimed at
making homeownership a possibility rather than a long shot. The best
advice to someone considering taking the FHA route is to do your
homework. A few simple phone calls can give you all of the information
that you need. If your local lender cannot answer your questions,
contact the local office of the Department of Housing and Urban
Development.
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