Is an FHA Loan Right For You?
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FHA 203K Rehabilitation Loan. Interested in buying a house that needs repairs? Learn more on how to finance the repairs.
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The Federal Housing Administration (FHA) is a government run agency that insures the quality of loans issued by banks. In essence, FHA helps lessen a lenders loss in the event of a foreclosure. FHA offers many advantages:
- Low down payments (as low as 3.5%)
- Allows sellers to pay up to 6% of the borrowers closing costs
- Less restrictive credit requirements
- Allow for grants and down payment assistance from approved entities
Despite the many perks of an FHA loan, there may be guidelines or stipulations that would not fit your needs or you may not qualify for.
Borrower Eligibility
All eligible borrowers are required to have a social security number and at least 18 years of age in order to apply. Eligibility is only granted to U.S. Citizens or Permanent or Non-Permanent Alien Residents.
Credit Requirements
Most private loan programs require a credit score of at least 700, but FHA allows for credit scores in the low 600’s. Furthermore, while the majority loan programs require you to have three 3 accounts in good standing active for 12 months or longer, FHA will permit alternate trade lines. This means you can use other creditors who do not report to your credit report as a record of your payment history, such as utility companies, insurance companies or cell phones.
Down Payment Requirement
FHA requires a minimum down payment of 3.5% of your sales price. Here are a few acceptable sources that you can retrieve your down payment from:
- Your own money (Savings, Retirement, money market)
- Gift from immediate family, employer or grandparents
- Community Seconds or Grants
You can also negotiate with the seller to pay your closing costs and even help you receive a lower interest rate for your mortgage. Sellers can pay up to 6% of your closing costs.
Debt to Income Ratio
Most lenders, as well as FHA, require you to have a certain percentage of your income after you pay your monthly expenses. FHA and lenders consider your monthly expenses listed on your credit report (credit cards, car loans, personal and student loans, etc.).
Upfront Mortgage Insurance Premium
Upfront mortgage insurance is a premium collected at settlement that will cost 1.75% of the borrower’s loan amount. FHA allows you to finance the premium in to your loan or you can choose to pay it at settlement. This fee helps aide the lender in the event of a foreclosure. In some instances, if your loan is paid off earlier, you may have entitlement to a small refund.
MIP is paid to the lender on a monthly basis. This fee is tax deductible, as of May 1, 2009 (Contact your CPA or tax preparer to see qualifications for the tax deduction). MIP has a cost of .55% of your loan amount (divide by 12 to figure the monthly payment for your insurance premium). It is added to your total mortgage payment. Below is an example of the calculation.
Purchase Price $250,000
Down Payment $8,750
Upfront MIP $4221.88
Loan Amount $245,271x0.55% (MIP) =$1348.99
$1348.99/12=$112.42
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