FHA home loans are popular with people looking to purchase and refinance a home. Here are 10 benefits of FHA mortgages.
Top 10 Benefits of an FHA Loan
FHA home loans appear to be the new belle of the mortgage ball. They were less popular during the recent housing boom when many people flocked to subprime mortgages and high LTV Fannie Mae loans, but as the housing market stumbled and lending standards tightened, many borrowers have rediscovered the benefits of the FHA mortgage. The market share for Federal Housing Administration (FHA) home loans jumped to 23.7% at the end of 2008 from 1.9% in the fourth quarter of 2006, according to the Department of Housing and Urban Development (HUD). Here are 10 reasons to get an FHA loan.
- You can borrow almost 97% of the value of a home. You'll have to come up with at least a 3.5% down payment, but some money can come from gifts or grants. That means people with moderate incomes or who are first-time homebuyers may have a better shot at meeting FHA guidelines.
- 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.
- 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.
- 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.
- 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.
- People who are self-employed may qualify for an FHA mortgage if they have tax returns for the previous two years, a current balance sheet, and a profit and loss statement. People who've been self-employed for a year could qualify if they had a stable employment history the previous two years and still work in the same field.
- 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.
- 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.
- FHA loans come with fixed mortgage rates. One of the main reasons so many homeowners have gotten into trouble with their house payments is because of adjustable rate loans (ARMs). FHA's fixed mortgage rates can give you stable payments over the life of the loan, protecting you from jumps in interest rates.
- 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 mitigating factors (such as just graduating from medical school).
FHA guidelines are designed to offer more flexibility for evaluating individual borrowers. You can contact an FHA lender to get more information on available loan programs and discuss the specifics of your situation.
Francine Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows. Visit her Web site, www.Huffwrites.com.