FHA Loans

The Federal Housing Administration (FHA), which is part of the U.S. Dept. of Housing and Urban Development (HUD), administers various mortgage loan programs. FHA loans have lower down payment requirements and are easier to qualify than conventional loans. FHA loans cannot exceed the statutory limit.

Why Choose an FHA Loan?

1. You can borrow 96.5% of the value of a home. You’ll have to come up with at least a 3.5% down payment, but that money can come from gifts. That means people with moderate incomes or who are first-time homebuyers may have a better shot at meeting FHA guidelines. On a refinance you can borrow 97.75% of your homes value.

2. There is no minimum credit score requirement, but people with really bad credit may be denied a loan. Having a 620 score or higher will make you a more serious contender to get approved. You also won’t be automatically disqualified if you have a foreclosure, bankruptcy, or short sale in your past. Lenders may consider approving a loan if it’s been at least three years since a foreclosure or short sale and at least one year since a bankruptcy filing – depending on the circumstances of the filing and that you prove that you’ve managed your finances responsibly since those negative events.

3. Borrowers who don’t have an established credit history won’t automatically be denied an FHA loan. However, mortgage lenders will want to see a stable history of paying bills for things such as rent or utilities.

4. FHA home loans can be used to refinance as well as purchase a home. The streamline refinance is for mortgages already insured by FHA. You’ll need to be current on your payments to qualify but won’t need a new appraisal or credit check. Some lenders offer no – cost refinancing and will charge a higher rate of interest and pay the closing costs, or will wrap the closing costs into the amount of the new loan.

5. FHA guidelines do not require you to get your home appraised for a streamlined refinance. That means means you could qualify even if you’re under water on your mortgage, or owe more than the appraised value of your home. The refinance program also involve less paperwork than traditional mortgage programs through Fannie Mae and Freddie Mac. But you will need to prove that you are employed.

6. People who are self-employed may qualify for an FHA mortgage if they have tax returns for the previous two years. People who’ve been self-employed for a year might still qualify if they had a stable employment history and still work in the same field.

7. FHA offers the 203(k) loan for homes that are fixer-uppers. This program allows you to get a mortgage for the amount of the purchase price plus the funds needed to make repairs and improvements to a house you plan to live in as your primary residence.

8. FHA will allow the seller of the home you buy to contribute up to 6% of the purchase price toward closing costs. Many sellers have offered this type of incentive to homebuyers in this slow housing market. You’ll need to get the seller’s commitment in writing as part of the purchase agreement.

9. FHA loans come with fixed mortgage rates. FHA’s fixed mortgage rates can give you stable payments over the life of the loan, protecting you from jumps in interest rates.

10. There is no maximum threshold for debt-to-income ratios for borrowers of FHA home loans. But if you have a debt-to-income ratio above 45% of your gross income you’ll be expected to have a significant cash reserve or other compensating factors.

FHA Loan Options

1. FHA Fixed Rate Mortgage - Your interest rate is locked for the entire length of your mortgage and you enjoy the benefit of having a predictable monthly payment.

2. FHA Adjustable Rate Mortgage (ARM) - You pay a lower interest rate during a pre-determined initial period. Then, your rate resets based on different factors. These mortgages are usually ideal for homeowners not planning on staying in their home for a long time.