Getting To Know FHA Loans

Dated: 11/08/2018

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Image titleDreaming of a starter home? Feeling like it might be too far out of reach? Think again. You might just need a good starter mortgage to help you get there. Mortgage programs offered through the Department of Housing and Urban Development's Federal Housing Authority (FHA) make it easier for borrowers with limited down payment funds or imperfect credit to get a mortgage. Of course, FHA loans aren't for everybody, but they can be great for many people, especially those looking to buy their first home.

If you're curious to know if an FHA loan might be for you, let's address who these loans are made for before you spend your time reading this entire blog only to find out it doesn't apply to you. FHA loans can be more forgiving than conventional loans. They are great for people with credit scores in the mid to upper 600s with minimal down payments. Unpaid bills like medical bills may be forgiven to qualify for an FHA loan, but it's much less forgiving for unpaid monthly loan payment or credit card accounts. Your debt-to-income ratio plays a big part here. While conventional loans may allow upwards of 45 percent of your income go towards debts, FHA mortgages are more selective. Currently, your overall debt has to be below 43 percent to qualify for an FHA loan and your housing debt can't exceed 31 percent. The reason for this is to ensure you won't default.

How much do you have to put down? This is the first question most homebuyers as themselves when first shopping for a loan. FHA loans currently maintain one of the lowest downpayment requirements of any mortgage offering, though there are some copy-cat conventional loans today. At just 3.5 percent for a down payment, FHA loans make home buying much more attainable. The caveat is the mortgage insurance that comes along with a loan of this type. In order to allow you to put such a small amount down for the life of the loan, the mortgagor needs some sort of assurance - what we call mortgage insurance. This gets added to your monthly mortgage payments. Once you've paid off 20 percent, you can refinance to shake off the mortgage insurance, but as with anything, there are no guarantees. Not to mention, because FHA loans are federally regulated, the closing costs are often much lower.

One thing FHA mortgages are exceptionally strict on is student debt. FHA calculates 1 percent of your total student loan debt into your monthly debt-to-income ratio. So even if you're paying less than that per month, it will add 1 percent to monthly debt which could result in a rejection of this loan program if you have an excessively high student loan balance. So, if you don't have excessive amount of student loan debt and you plan to sell in the next five to seven years, an FHA loan may be the answer for you helping you to get into the real estate market quicker without putting too much down upfront and allowing you more time to create equity in something rather than waste money on rent.

If after reading this, you're convinced FHA might be the route for you, or you just want some more info to consider your options, contact us or our preferred lender.

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Liz Peters

An Orange County native and Team Manager of The Kurt Real Estate Group with a heavy background in both Marketing and Transaction Coordinating, Liz has handled it all - from listings to buyers, from t....

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