By Tony Caro
Among the several programs put in place by the federal government to promote home ownership, there is one that offers homeowners a number of benefits. The FHA loan, insured by the Federal Housing Administration, allows lenders to give would-be homeowners a better deal on their mortgage. This also means that a homeowner has the opportunity to get a mortgage more quickly with easier qualification, a low closing cost and a low down payment.
Who Can Benefit From An FHA Loan?
There are five situations from which would-be homeowners can benefit from getting an FHA loan.
1. Those looking to improve the energy efficiency of their homes can take advantage of the FHA Energy-Efficient Mortgage. This option eliminates the need for homeowners to take out a second mortgage on their home in order to cover energy efficiency upgrades.
2. Seniors wanting to get money from their homes but continue to live there can do so with the FHA Reverse Mortgage, which allows for partial conversion of home equity into cash.
3. First-time home buyers can enjoy down payments as low as 3.5% of the purchase price of their 1-4 unit property, with fees and closing costs included in the loan.
4. Those who need financing for a mobile or factory-built home can take advantage of two FHA products.
5. One-loan coverage for those looking to either purchase a fixer-upper home or remodel or repair their current home is available.
What's Needed To Qualify For An FHA Loan?
There is an income requirement for the FHA loan. Your DTI (debt-to-income) ratio - which is your total monthly household expenses divided by your total monthly gross income - must be at .43 or lower. Looking at your credit report will reveal some of your monthly expenses, which will need to be added to your property taxes, insurance and your new mortgage payment amount.
If you are self-employed and have had your business for two years or more, the question of your FHA loan qualification can be answered by consulting your tax return for your net income after deductions. Dividing that number by 12 will reveal your total monthly gross income. However, these aren't the only two ways you can qualify. If your debt ratio exceeds their limits, you may still qualify for an FHA loan if you:
- Have three months of reserve savings in your bank account after closing;
- Use credit sparingly; - Either paying an amount that equals or exceeds new mortgage payment amount;- Can verify an earnings increase;
- Will see a minimal increase in your housing payment.
Why FHA Loans Aren't For Anyone
Although the FHA loan has many benefits, as with anything else you're looking to purchase, there are always caveats.
First of all, you will have to have some sort of credit history in order to be able to apply for an FHA loan. Even though your credit doesn't have to be perfect, you will need to show at least some evidence that you are capable of handling credit. There may be considerations for extenuating circumstances, such as when a wage earner falls ill, as well as for bankruptcies and collections.
FHA loans come with a 1% up front, and 0.85 to 0.9% annual insurance premium for the first five years. And this is regardless of whether or not your home has sufficient equity or your loan to value ratio is 20%.
You will also see a lower loan amount with FHA loans, which means you may not be able to borrow as much as you need.
Finally, there are fewer options for home loans with FHA than there are for other loaning institutions. This is because the FHA loan serves the basic needs of a particular group of buyers. As such, the loans are of low risk to lenders.
The FHA is just one option when the goal is to become a homeowner. Understanding which options are available to you can mean that you're more informed when the time comes to make a decision about how you want to handle your mortgage.
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