The Federal Housing Administration (FHA) doesn’t make or guarantee loans, but it’s been insuring home loans since 1934. The insurance on FHA loans removes or minimizes the default risk lenders face when borrowers put down less than 20% of the purchase price. FHA-approved lenders are authorized to process loan applications, underwrite, and close FHA loans.
Why Is an FHA Loan a Good Option for Single or First-Time Homebuyers?
First-time and single homebuyers should explore FHA loan options for several reasons. First, it will be easier to qualify for an FHA home mortgage because your loan will be insured by the government, thereby making your application more attractive to lenders.
Second, an FHA loan often costs less than a conventional mortgage and is more forgiving of issues with credit and payments.
Third, FHA home loans don’t require a large down payment at closing time, which is a huge plus for first-time homebuyers or an unmarried person seeking to buy a home on a single income. Since January 1, 2009, FHA borrowers can finance 96.5% of the purchase price and put down only a low 3.5% down payment!
Yet another advantage to FHA loans for single or first-time buyers is that FHA mortgage terms may allow you to wrap closing costs into your mortgage. Because typical closing costs for FHA home loans are around 2% or 3% of the total mortgage, this option can allow you to get a loan that would otherwise be cost prohibitive if you don’t have stacks of extra cash at your disposal.
Are there Other Advantages to FHA Mortgages?
There are several advantages to FHA mortgages, particularly if you’re a lower- to middle-income buyer or you have experienced financial difficulties in the past. Your allowable debt-to-income ratio is higher on an FHA loan than the debt-to-income ratio requirements on conventional loans, meaning that if your debt is relatively high compared to your income you may still qualify for an FHA loan.
Even if your credit is less than perfect, you may qualify for an FHA loan because your credit scores don’t need to be as high as they would for a conventional loan. Credit scores as low as 580 currently may qualify for an FHA loan. If you declared bankruptcy, you may be able to get an FHA loan two to three years from the date of your bankruptcy discharge, as long as you’ve maintained good credit since your debts were discharged. Furthermore, if you foreclosed on a former home and have kept your credit in great shape since the foreclosure, you can apply for an FHA loan two to three years from the final date of your foreclosure.
Another appealing feature of FHA loans is that their mortgage rates and terms are competitive with conventional mortgages. Interest rates on FHA loans generally fall within .125 % of rates on conventional loans. Also, with an FHA loan, your mortgage insurance is funded into the loan, meaning a premium of 1.5% is added to the loan balance instead of being paid out-of-pocket.
Why Would I Choose to Refinance with an FHA Home Mortgage?
FHA refinance loans can help people get out of problematic debt situations caused by sub-prime mortgages with interest rates that have spiraled out of control. If you’re currently facing default or foreclosure on a conventional loan, FHA home mortgage refinancing may be the best way to keep your home and prevent damage to your credit rating.
Even if you are not having trouble making payments on your current home loan, you may still wish to consider refinancing with an FHA loan, particularly if you have an adjustable rate mortgage that is set to adjust soon. It’s easier to qualify for an FHA mortgage than a conventional loan, and you still get the benefits of a fixed interest rate and predictable monthly mortgage payments.
How Could FHA Cash-Out Refinancing Options Help Me?
If you know you’ll soon need cash for college tuition or major home improvements, then an FHA cash-out refinancing option may be just what you need. You may be able to get a lower interest rate than a traditional home equity financing. FHA refinancing loan offers amounts up to 85% of the appraised value.
Are There any Special Requirements or Limits on FHA Mortgages?
FHA mortgage loans cannot take up more than 29% of your monthly income, and your loan officer will ask for your income tax returns as verification of your income to determine if you qualify. If your job status has changed since your last tax filing, you may be able to furnish proof of income through your new employer.
Because FHA home loans also have requirements for debt-to-income ratios, maximum loan amounts, and other details, it’s important to ask your lender for help when deciding which mortgage is right for you.
Another consideration is the limit on the amount of money you can borrow with an FHA. As of January 1, 2009, the maximum mortgage limit in high-cost areas is 115% of local median prices, not to exceed $625,500. Although the maximum conforming loan limit is $417,000 for single-family residences nationwide, your area may have a lower mortgage limit. Talk to a home loan expert to find out more.
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