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All You Need to Know About FHA Loans
Author David Schneider | Nov 16,2007
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The Federal Housing Administration (FHA) is a government agency. The FHA is not a lender and does not offer mortgages directly to consumers. This agency actually insures the mortgages that are offered by mortgage lenders to protect them from consumers who default on their mortgages. The sole purpose of FHA is to help consumers to be able to afford to become homeowners. So how do FHA loans work and what are the guidelines? Read on to find out all about FHA loans and how they may work for you.
Ways FHA Loans Help Homebuyers
Generally, when you are purchasing a home, a down payment of 20 percent is required. The mortgage then covers the other 80 percent of the purchase price. FHA loans have a greater appeal to homebuyers because they require as little as three percent down. A down payment of three percent is much more realistic for most homebuyers and makes buying a home a much easier goal to accomplish than being expected to come up with 20 percent of the purchase price. So whether you are a first time homebuyer or you just do not have a lot of cash for a down payment, FHA loans can help you to move into the home of your dreams. Remember, FHA does not write mortgage loans itself. The FHA actually acts as insurance for loans made by lenders. If in fact a homebuyer defaults on an FHA loan, the FHA insurance fund will be paid to the lender.
FHA Guidelines
Are you thinking that FHA loans sound too good to be true? Are you wondering what the catch is? Well, there isn’t really a catch, but FHA guidelines are a bit more stringent that mortgage loans that are not backed by the FHA. First, FHA loans require that the monthly mortgage costs cannot be more than 29 percent of the borrower's gross monthly income. This calculation includes the monthly mortgage payment, property taxes and insurance.
Next, FHA loans require that the borrower’s total monthly obligations cannot exceed 41 percent of the gross monthly income. These debts include other contractual obligations that you may have like car loans, personal loans, credit cards, student loans, etc. Daily living expenses like food, utilities and car insurance are not calculated in the qualification payment, but they are expenses that you should personally consider when determining whether you can afford to buy the house that you are considering. So before you apply for an FHA-backed home mortgage, try to pay down your current debt and try to avoid taking on any additional debt.
Credit history and credit score also play a major role in getting approval for an FHA loan. FHA requires borrowers to have a mid to high credit score to be able to qualify for a loan. Payment history (making payments and making payments on time) is a big part of how your credit score is calculated. For this reason, your payment history must be good and up-to-date in order to be able to obtain an FHA-backed loan.
Finally, there is a maximum amount of a mortgage that FHA-backed loans will cover. Depending on which part of the country the home is located, these caps may vary. The caps vary from state to state and even from county to county. In some areas, the cap may be as high as $251,000, while only $151,000 in other areas. This lending cap will also limit you on the price of the homes that you can afford to buy if you can only afford to put down three percent and apply for an FHA loan.
So, FHA loans have their benefits, but they also have their limitations. It is important to keep the FHA guidelines in mind when shopping for a home and when shopping for a mortgage, if you plan to utilize an FHA-backed loan. The Federal Housing Administration (FHA) is a government agency. The FHA is not a lender and does not offer mortgages directly to consumers. This agency actually insures the mortgages that are offered by mortgage lenders to protect them from consumers who default on their mortgages. The sole purpose of FHA is to help consumers to be able to afford to become homeowners. So how do FHA loans work and what are the guidelines? Read on to find out all about FHA loans and how they may work for you.
Ways FHA Loans Help Homebuyers
Generally, when you are purchasing a home, a down payment of 20 percent is required. The mortgage then covers the other 80 percent of the purchase price. FHA loans have a greater appeal to homebuyers because they require as little as three percent down. A down payment of three percent is much more realistic for most homebuyers and makes buying a home a much easier goal to accomplish than being expected to come up with 20 percent of the purchase price. So whether you are a first time homebuyer or you just do not have a lot of cash for a down payment, FHA loans can help you to move into the home of your dreams. Remember, FHA does not write mortgage loans itself. The FHA actually acts as insurance for loans made by lenders. If in fact a homebuyer defaults on an FHA loan, the FHA insurance fund will be paid to the lender.
FHA Guidelines
Are you thinking that FHA loans sound too good to be true? Are you wondering what the catch is? Well, there isn’t really a catch, but FHA guidelines are a bit more stringent that mortgage loans that are not backed by the FHA. First, FHA loans require that the monthly mortgage costs cannot be more than 29 percent of the borrower's gross monthly income. This calculation includes the monthly mortgage payment, property taxes and insurance.
Next, FHA loans require that the borrower’s total monthly obligations cannot exceed 41 percent of the gross monthly income. These debts include other contractual obligations that you may have like car loans, personal loans, credit cards, student loans, etc. Daily living expenses like food, utilities and car insurance are not calculated in the qualification payment, but they are expenses that you should personally consider when determining whether you can afford to buy the house that you are considering. So before you apply for an FHA-backed home mortgage, try to pay down your current debt and try to avoid taking on any additional debt.
Credit history and credit score also play a major role in getting approval for an FHA loan. FHA requires borrowers to have a mid to high credit score to be able to qualify for a loan. Payment history (making payments and making payments on time) is a big part of how your credit score is calculated. For this reason, your payment history must be good and up-to-date in order to be able to obtain an FHA-backed loan.
Finally, there is a maximum amount of a mortgage that FHA-backed loans will cover. Depending on which part of the country the home is located, these caps may vary. The caps vary from state to state and even from county to county. In some areas, the cap may be as high as $251,000, while only $151,000 in other areas. This lending cap will also limit you on the price of the homes that you can afford to buy if you can only afford to put down three percent and apply for an FHA loan.
So, FHA loans have their benefits, but they also have their limitations. It is important to keep the FHA guidelines in mind when shopping for a home and when shopping for a mortgage, if you plan to utilize an FHA-backed loan. |
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