Minnesota Mortgage Blog - MN Mortgage and Real Estate News

FHA loans can help first-time buyers

So, you want to buy a home? If you have little or no money for a down payment, weak or no credit, an FHA loan could be what you need to buy a house.

The Federal Housing Administration, a part of the Department of Housing and Urban Development, was created 70 years ago to help first-time buyers, especially low-to-moderate income families and minorities, get the home financing they need.

Since the federal government guarantees repayment, the lender knows it will not lose money on the deal. That allows the bank or mortgage company to offer competitive rates on a loan that's easier to qualify for than some conventional loans.

You can get an FHA-backed loan from many lenders. Most small brokers can’t offer them, and many lenders have only recently jumped on the FHA wagon as sub-prime loans have basically gone away, so be sure to contact someone with plenty of FHA experience (like us!) when inquiring about FHA.

FHA loans aren't as popular as the once were, primarily for four reasons:

• Because the limits on how much you can borrow didn't keep up with soaring home prices. (check your areas loan limit)

• The explosion of loan products that were easier to offer customers

• The explosion of small brokers unable to offer FHA loans put people into loans they could offer

• FHA loans are more complicated for the Loan Officer, so many never took the time to learn them.

As a result, the FHA loan numbers are way down from years past, but with a wave of foreclosures making alternatives such as sub-prime loans and 100% financing more difficult to obtain, FHA is growing in popularity again, and every first-time buyer should at least consider an FHA loan. Your parents probably got an FHA loan to buy their first home!

You don't need a big down payment and your lender can help you get it
An FHA mortgage current requires only 3% down -- that's $30 for every $1,000 you borrow. Don't have it. No problem. It can be a gift from a relative, friend or an organization that provides financial assistance. At the time of writing this, pending legislation is attempting to lower the down payment to just 1.5% down - so be sure to inquire with your mortgage professional about current guidelines.

Your credit doesn't have to be perfect (but you can’t be horrible!)
On conventional loans, think square peg into square hole. FHA is more liberal, and while they look at credit scores, your score isn’t as important. No credit score at all? No problem.

Your overall picture is more important to FHA. FHA cares about your record of paying your bills, and paying them on time, for at least the past two years. It will overlook minor lapses on your credit history if there's a well documented reasonable excuse such as losing a job or serious illness. But your bill-paying prowess is a critical factor for every application. In the end, the FHA does have rules that determine who gets a mortgage and who doesn't, but again, think more liberal, and more willing to work with you.

There are things the FHA will not overlook. If you've:

• Declared bankruptcy, you must wait two years from the date of discharge and have re-established good credit before you can apply.
• Lost a home through foreclosure, you must wait three years and have a clean credit history during that time.

FHA doesn’t lend trouble: The maximum house payment FHA allows (Your debt-to-income ratio) may be considerably lower for an FHA loan than a conventional loan. That sounds bad, but is actually good.

Add your total mortgage payment (principal, interest, taxes, hazard insurance, mortgage insurance and homeowner's dues, if they apply) to regular monthly obligations, such as credit card debt, auto loans, student loans or court-ordered payments like child support or alimony. (Utilities, food, clothing and so forth are not factored in). Then you divide this total by your monthly income, which is the before-tax income of those making the payments.

You can qualify for an FHA loan if your monthly debt payments are no more than 43% of your income. Most conventional loans can get loan approval significantly higher (as much as 64.99%), which allows you to buy a lot more home than you probably should. This is a giant factor in the mortgage meltdown. People bought more house than they should have!

There are many different types of mortgages to choose from: FHA offers the typical 30-year fixed-rate loans and short-term adjustable loans, but doesn’t offer high risk loans like interest-only mortgages.

Competitive rates. The interest rate will depend on your credit history, with the best rates given to those with the best record of paying their bills and earning a steady income.

But in general, you can expect an FHA loan to be very competitive to any other loan you might qualify for. An FHA loan is almost guaranteed to be cheaper than a sub-prime loan, which had been very popular the past ten years. That's why it's critical to seek an FHA loan before accepting such a high-cost mortgage.

Limits on how much you can borrow
FHA has one drawback, and that is the maximum amount you're allowed to borrow depends on where you live. It's easy to check the maximum loan amounts in your area.

They are working on increasing the maximum loan limits in the future, so be sure to check before you assume.

The Bottom Line: FHA loans have helped thousands of people buy their first homes. Could one help you? Contact an FHA professional like us for a free no cost, no obligation analysis of your situation, you could be a homeowner a month from now!

More info: www.JoeMetzler.com