February 14th, 2013
An FHA loan is one that is backed by the Federal Housing Administration. These loan programs have held a steady reputation for their ability to help families with modest budgets, which is why they have become much more popular with the recent housing crisis. FHA loans account for nearly half of the loan market, and their advantages include a lower down payment and less restrictive criteria in terms of credit scores.
If you are considering an FHA loan program, now is a great time to take advantage of the opportunity of low housing prices and interest rates, as well as incentives for first-time homebuyers. Still, there are things you should know to determine whether an FHA loan program is right for you.
Smaller Down Payment
Most FHA mortgages require a 3.5 percent down payment, as opposed to the 5 percent that is common with conventional loans. In fact, some other loans require a 20 percent down payment. And, if you’re in a position where you need to borrow the down payment, you can. This type of loan program allows for monetary gifts from a friend, family member, coworker or charitable organization.
Bankruptcy, Foreclosures and Short Sales Mean Wait Times
With the housing crisis, many homeowners have found themselves in a position where they short saled or foreclosed on their property. Or, maybe they filed bankruptcy. In these situations, FHA loan programs have waiting periods: there is a minimum 2-year waiting period for bankruptcies and short sales, and a 3-year waiting period for foreclosures. Remember that these are just minimum wait times; it’s not uncommon for lenders to change their program requirements.
Low Credit Scores are Okay
FHA loans are more lenient on credit scores. They generally accept scores that are between 580 and 620, with anything higher being considered excellent. Yet even those who have scores of 580 or less may qualify; although they may need a larger down payment. This is a huge advantage for homeowners who have struggled with debts in the past or filed for bankruptcy. Individuals who foreclosed or short saled their homes also take a hit on their credit scores, and FHA loan programs are more forgiving in these circumstances.
When it come to credit scores you should always check with a lender first, as different lenders have different criteria for their programs.
Closing Costs May be Paid For
With average closing costs at $6,000 to $7,000, it’s a huge advantage to have them covered. Such is the case with FHA loan programs, where builders, lenders and home sellers are allowed to pay some of the buyer’s closing costs. This is common for home builders who offer an incentive of paying the closing costs for buyers. The only drawback to this is that the buyer may receive higher interest rates from the lender if they get their closing costs paid for. If you are in this situation, use the Good Faith Estimate (GFE) to compare interest rates and closing cost options. A slightly higher interest rate may work out better than having to pay thousands in closing costs, especially for first-time homebuyers.
More Acceptable Debt
For most non-FHA loans, you must only spend 36 percent of your pretax dollars on debt like school loans and credit card bills, but with FHA loans, you can spend up to 41 percent. If you have excellent payment history, you may even be able to spread that number a bit further. Just remember not to stretch yourself too far. After all, you do want to eat.
Mortgage Insurance is Must
The only drawback to FHA loans is that you must pay the government to back up your loan, regardless of how much you put down. Mortgage insurance comes out to $1,750 for every $100,000. This insurance is divided up by 12 months, and you’re required to carry it for at least 5 years. Keep in mind that even conventional loan holders must pay insurance; the difference is that you can drop the insurance when there is 80 percent left on the loan, as opposed to 78 percent left on an FHA loan.
Shop Around for the Best Rates
Keep in mind that FHA is not the lender. Therefore, borrowers should shop around to find the best rates. FHA-approved lenders vary, which means that you can get the same exact loan from two different lenders with two different interest rates and costs. Since each situation is unique, you shouldn’t take one offer for granted. A few questions go a long way in this industry, so never hesitate to cross all avenues.
If you think an FHA loan is right for you, contact Stephanie Weeks to get started.