One of the few blessings to come out of the Great Depression was the FHA-insured loan. Although, contrary to what many think, it wasn’t created to help low-income buyers get into homeownership. Just as during our recent recession, in the Great Depression foreclosure rates skyrocketed, leaving lenders in the lurch. The FHA-insured loan was created to protect lenders from losses should the economy once again tank. So it’s good for the lenders but is an FHA-insured Mortgage what you need?
The borrower does receive benefits from the loan. First, the borrower benefits from the detailed appraisal of the home, and second, from the low down payment requirements and attractive interest rates offered by lenders.
Although the Federal Housing Administration (FHA) won’t be loaning the money to you directly (you’ll see a conventional lender for that), they’ll take a look at your credit profile to determine whether they want to offer insurance on your loan.
Recent FHA changes call for a manual review of applicants with credit scores below 620 and debt-to-income ratios of 42 percent or higher. While these conditions don’t automatically disqualify a borrower, it does decrease the number of applicants who qualify.
Remember, the lender may have stricter requirements, so it’s always a good idea to take a look at your credit reports, fix any errors, and pay down some of your debt before applying for a mortgage.
The Down Payment
American home buyers love the low down payment aspect of the FHA loan. Although lending criteria has tightened since the economic downturn, down payment requirements are still low – as low as 3.5 percent of the purchase price of the home.
An applicant with a FICO score lower than 579 may have to pay a 10 percent down payment, while those with higher scores – assuming they have adequate income and meet other loan requirements – typically qualify for the lower down payment.
Most homeowners know what PMI is – Private Mortgage Insurance. It’s that policy they pay for but derive no benefit from. PMI protects the lender in case the borrower defaults.
FHA-insured loans also mandate mortgage insurance, but it’s known as the Mortgage Insurance Premium (MIP) instead of PMI. As with PMI, FHA at one time allowed borrowers with a 78 percent loan balance to cancel their mortgage insurance premium. As of June 2013 that changed.
New FHA borrowers with low down payments (a starting loan balance of more than 90 percent of the value of the home) must pay for MIP as long as they have the loan. Borrowers with balances lower than 90 percent can choose to stop paying for MIP after 11 years.
If you don’t have the cash to make a large down payment, an FHA-insured mortgage may be just the tool you need to allow you to get the home you want. To find out what you qualify for please contact one of our Preferred Lenders by Clicking Here.
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