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Archive for January 19th, 2012

FHA loans are a great way for first-time property buyers with a lower down payment fund to buy a property.

An FHA mortgage is one that is insured by the Federal Housing Association, in conjunction with the U.S. Department of Housing and Urban Development (HUD), and is open to all qualified homeowners. The FHA works to encourage the availability of housing for low- and moderate-income families, but can assist almost any moderate-priced home in the United States.

How Do FHA Mortgages Work?

FHA mortgages offer lower percentages of securing down payments than conventional mortgages, sometimes as low as 3% down. FHA loans are not home loans, but insure home loans. The government uses a Mortgage Insurance Premium (MIP) as means of insurance. MIP’s are divided into two parts: upfront and renewal. The upfront MIP is financed into the loan amount, while the renewal premium is escrowed into the monthly payment. The MIP of FHA loans are generally more than those of conventional loans, but the insurance is worth it.

An FHA loan acts as a sort of safety net for the homeowner. If you should default on (fail to pay) your payments, your lender will be paid from your insurance fund. This loan assures you will never miss a payment and cause damage to your credit or the relationship with your lender.

Pros and Cons of FHA mortgage

As with almost all mortgages and loans, FHA loans have both good and bad points. On the pro side of things, one of these loans allows you to put down less money to qualify under generous guidelines, and there is no maximum on income to qualify. On the con side though, there is a maximum on the loan amount and that maximum is not nearly as high as conventional loans. These loans are worth less because they are geared towards first-time buyers and mortgage borrowers who cannot afford high-priced homes and the higher down payment those houses would require.

Qualifying

There are different sized FHA loans to accommodate all sorts of people and financial situations, but most require a good credit history and sufficient income to qualify.

Previously, the Federal Housing Association used to qualify homeowners by a complicated residual income method. Now, for the sake of both the lender and the homeowner’s understanding and sanity, they use gross qualifying similar to that of conventional mortgages, but with higher ratios. There are two ratios the FHA primarily uses for these types of loans, (1) 29% of gross monthly income for housing expense or (2) 41% of gross monthly income for housing expense and all monthly debts with over six months to pay off.

With the technology advances of today, qualifying only takes a couple of days, whereas it used to take 30 to 45 days. Also, another important fact to remember is if you pay off your FHA loan early, part of the MIP will be refunded to you. The longer you hold onto the loan, the less you will get back.

Final Notes

So if you are considering an FHA loan, talk to your lender and see if it is the right option for you.