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Saturday, March 30, 2013

What is an FHA loan?

By Daniel Duffield

An FHA loan is a loan that is insured by the Federal Housing Administration. Since the FHA guarantees to pay the balance in the event of a loan defaulting, rather than the lender having to write it off, FHA loans are open to people with poor credit history or to those who are unable to make large down payments. A FHA Loan can help you acquire a home with as little as 3.5%, instead of the high percentages required to obtain a typical conventional loan. This allows a great advantage for first time home buyers or anyone who wants smaller down payments to buy a home.
What is the FHA?

The Federal Housing Administration was created in 1934 to combat the effects of the Great Depression by providing citizens with access to affordable loans, thus providing many Americans with the means to purchase a home. Since its initiation, the FHA has helped to finance over 34 million homes, and FHA loans remain popular today.

What are the qualifications for an FHA loan?

If you are considering an FHA loan, you must be able to meet FHA requirements. Firstly, to even consider obtaining an FHA loan, you must be able to pay the minimum 3.5% down payment on the loan. Next, you must pay the 2.25% closing cost, however, this amount may be added to the loan itself. Additionally, to secure an FHA loan you must be in decent credit standing; if you have filed for bankruptcy or undergone foreclosure, you can still qualify as long as you have raised your credit rating since then. Moreover, you must be able to show a record of continuous income to prove to a lender your reliability. Finally, you must pay the title costs, which are fees related to the transfer of a property title.

Be able to make a 3.5% down payment
Pay 2.25% closing cost (can be added to the loan)
Be able to show proof of 3 years of continuous income
Have proof that you have paid all bills continuously for the past 3 years
If you have filed for bankruptcy, it must be at least 2 years old and you must have since had a good credit standing (Chapter 7 - 2 years, Chapter 13- 1 year)
If you’ve had a foreclosure, it must be at least 3 years old and you must have since had a good credit standing
Pay all title related costs (title search, title insurance, etc.)
Who should get an FHA mortgage loan?

If you are unfamiliar with FHA loans or inexperienced with loans in general, an FHA loan might be the loan for you. Typically, loans secured by the Federal Housing Administration best fit first-time home buyers or borrowers with low to moderate income. This dates back to the creation of the FHA as a means of stimulating the economy during the Great Depression by making it easier for people with lower credit scores or less income to secure a loan and purchase a home. As such, FHA mortgage loans tend to be best for those who are otherwise unable to acquire a conventional mortgage loan, though this is not always the case. Here are a few questions that you might ask yourself to determine whether or not an FHA loan is your optimal choice:

Have I had a steady income for the last two years?

When applying for an FHA loan, it is important to provide your lender with proof of two years of steady income. Although not mandatory, your chances of qualifying for an FHA mortgage loan without proof of income are significantly lower.

Do I have a low credit score?

FHA loans have low credit requirements, which enable many people with bad credit to secure loans. Even after filing for bankruptcy or undergoing a foreclosure, you may still have the necessary credit to qualify for an FHA loan, provided you have improved your credit standing since then.

Will I be able to put forward a large down payment?

If you are unable to afford putting down a large sum for a down payment, you should consider taking out an FHA mortgage loan. FHA loans down payments can be as low as 3.5%, considerably lower than conventional mortgages.

Will an FHA loan cover the cost of my potential home?

The Federal Housing Administration has separate loan limits for each county. If your potential residence costs more than the maximum limit for an FHA loan, you should consider alternatives.

Do I qualify?

Last but certainly not least, in order to even consider getting an FHA loan, you must first know whether or not you qualify. Make sure to get pre-approved before you start looking for your home.

What are the advantages to an FHA loan?

For the right borrower, FHA home loans have many advantages. For instance, FHA loans are more affordable than conventional loans since down payments can be as low as 3.5%. In addition, when acquiring an FHA loan, lenders tend to be more lenient in considering borrowers’ credit rating, since the Federal Housing Administration insures that the loan will be paid in full. Consequently, FHA loans can be acquired even by borrowers who have filed for bankruptcy or undergone foreclosure.
Furthermore, FHA loans do not include prepayment penalties.

Low down payment requirement of only 3.5%, with credit scores as low as 580.
More lenient on credit ranking as opposed to a conventional loan
Borrower can add closing costs to the loan amount
Offer very similar rates to conventional mortgages
Government has recently increased FHA Loan amounts to qualify more types of property
No prepayment penalties
Can still be acquired after bankruptcy or foreclosure

What are the disadvantages of an FHA loan?

The major disadvantage of FHA loan is that they include mandatory mortgage insurance, thus adding to the cost of the loan. Mortgage insurance payments are divided into an upfront mortgage premium of 1.75% and an annual premium charged in small monthly installments. Another disadvantage of FHA loans is the fact that many properties are ineligible (although this number is decreasing). Finally, FHA loans are less flexible and offer far less options than conventional loans.

Mortgage insurance premiums, upfront and annual
Not all properties qualify
Limited options compared to other loans

What are the FHA limits on loan amounts?

The limits on the maximum amount a borrower can receive from the FHA are relative to the housing costs in the area where the borrower’s intended property is located. In other words, in lower value home areas, limits for FHA loans cap at $271,000, though limits can be as high as $625,500 in areas with high valued homes. Regardless of your credit score and income, a lender cannot grant you a loan that exceeds FHA limits for that particular area.

What are the basic types of FHA loans?

FHA loans come in several different types, the most basic being adjustable rate and fixed rate FHA loans. In addition to these, there are also graduated payment mortgages, which are loans for homebuyers that expect their income to significantly rise within the next 5 to 10 years. Furthermore, Growing Equity Mortgages are special FHA loans that allow low income borrowers who expect an increase in their income to buy a house with incrementally increasing payments. As payments increase, the additional expenses go toward the mortgage’s principal, thereby reducing the term of the mortgage. Finally, Energy Efficient Mortgages (EEM) are designed to aid homeowners or homebuyers drastically decrease their monthly utility bills, incorporating these efficiency improvements into their FHA loan.

FHA Loan: Adjustable Rate
FHA Loan: Fixed Rate
Graduated Payment Mortgages
Growing Equity Mortgages
Energy Efficient Mortgage
203(k) Mortgage Loan

What Refinance Options are Available with FHA Loans?

For homeowners considering their refinance options, the FHA offers a standard refinancing program for homeowners with conventional mortgages as well as pre-existing FHA mortgages. FHA refinancing carries the same advantages of FHA loans, such as relaxed credit requirements and lower than average mortgage rates. In addition, homeowners with an existing FHA mortgage have the option of performing a streamline FHA refinance, allowing them to skip verification for credit score, income, and employment history, making the process much quicker and more convenient. In addition, FHA streamlined refinancing does not require a borrower’s property to be reappraised; instead, the FHA uses the original selling price of the home, significantly benefiting homeowners with underwater houses.

What types of property are insured by the FHA?

The Federal Housing Administration insures four types of properties: single family homes, condominiums, manufactured homes, and duplex units. For single family homes, the FHA will finance up to 97% of the home purchase price. Condominiums are also insured by the FHA; however, the building must have four or more units for personal residence, and condominiums that were previously used for renting may be ineligible. Manufactured homes are eligible for FHA Mortgage loans as long as the floor area of the property is 400 square feet or larger. Mortgages for manufactured homes must also cover both the home and the location where the home is situated. Duplexes, triplexes, and fourplexes all qualify for FHA loans as long as the property is solely owned by one person or family, though other families may live in them. Furthermore, all units of the property must be inhabited.

Single family homes
Condominiums
Manufactured homes
Duplex units

Where can I get an FHA loan?

Comparing multiple FHA mortgage lenders is always a wise idea when searching for the lowest and best mortgage rates for a FHA home loan.FHA mortgages are not actually originated by the FHA. The FHA merely provides insurance to cover private loans. As a result, the FHA loan process is not standardized. Terms and qualification requirements vary from lender to lender. Compare lenders in order to find the best terms to meet your needs. There are three elements of each offer you’ll want to check on when comparing:

1. Interest rate.
Find a lender that offers a solid low interest rate. The lower the rate is, the better, because this will mean less money out of your pocket in the long run. But don’t stop after comparing interest rates. A low interest rate may be a sign of high costs elsewhere in the deal.

2. Closing costs.
Many borrowers find themselves blindsided by high closing costs and hidden fees when securing a loan. Check up on these costs when comparing lenders. Often, a loan with a low interest rate will actually cost you more money due to high closing costs. Be careful.

3. Fixed or adjustable.
Adjustable rate mortgages always have lower initial interest rates than fixed rate mortgages, which could save you money, but be cautious. The interest rate for an adjustable rate mortgage may increase over time, costing you more. A fixed rate mortgage will never increase or decrease, but it will likely be higher overall than a similar adjustable rate mortgage. Make sure you know which is which, and make sure you know which variety you are signing up for.

Look at each of these elements when comparing different FHA lenders. It can be helpful to submit a request for quotes to a third party company that specializes in gathering mortgage rates. Many such companies will provide you with personalized quotes from a variety of lenders, and they’ll do it for free. This can save you time, stress, and effort, and you won’t have to deal with repetitive paperwork.

Regardless of how you find FHA lenders, compare these three elements and make sure you know what you’re looking for, otherwise you may find that your comparison is worthless.

My name is Scott Grebner and I have been helping my clients realize their own personal real estate dreams. Real estate is a relationship-based business that works best when client relationships are built on trust and confidence. My goal is having clients be completely satisfied with the professional and caring service they have received.

The role of technology is rapidly changing how the real-estate market functions in this country today. Gerharter Realtors is embracing these new mediums of communication to better serve our customers. We have created our e-family to better place important information in your hands to help you with your housing needs. As a part of Gerharter Enterprises we have access to a broader range of additional services and resources to better assist you. Visit me at my Web Site, Blog, Facebook, Twitter, You Tube or Pinterest. Please check out our helpful resources on Sellers Tips, Buyers Tips, Foreclosure Tips, and Mortgage Tips. For a personal consultation please visit our Office.

It seems that the dream of past generations was to pay off a mortgage. The dream of today’s young families is to get one. I would love to hear from you, about your Real Estate Dreams and questions.

Email me at scott@gerharterrealtors.com.

2 comments:

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