Many Americans dream of purchasing and owning their very first home. However, many Americans find this process very difficult. It can often be a painstaking endeavor. Given certain financial roadblocks, some borrowers simply don’t know what to do.
If you are considering purchasing a home, but are worried about the finances, you have options. There are a variety of loans that can assist individuals and families in need. When economic factors get in your way, consult a broker.
Top-rated mortgage brokers can help you develop the best mortgage application possible.
Don’t let your financial stress bring you down and prevent your dreams. If your credit score is less than optimal, you still have options. If your cash reserves and income are low, you may still be able to finance a home.
An FHA loan may be the mortgage option best for you.
What Is An FHA Home Loan?
These loans are most suitable for borrowers struggling to meet certain financial standards. Backed by the US Federal Housing Administration (FHA), these loans can only be provided by FHA-approved lenders.
With the help of these loans, borrowers can afford homes they otherwise could not purchase.
FHA loans are different from conventional loans in certain ways. Firstly, they are intended for new homeowners and not for property investors or developers. Because of this, the home in question must be occupied by an owner for at least 12 months.
Given the lower down payment and minimum credit score requirements, FHA loans require two mortgage insurance premiums. These premiums help to safeguard the lenders in case the borrowers default. In exchange for these premiums, low-income borrowers can finally finance the homes of their dreams.
The Benefits of an FHA Loan
FHA loan borrowers typically enjoy some of the most lenient standards of all loan types. FHA loans help people who may struggle to get approved for conventional loans. FHA loans may also be ideal for people who have experienced serious financial trouble.
For maximum loan financing, borrowers must make a down payment of 3.5 percent. This is the minimum amount and can even be provided by a family member.
There are other key advantages to borrowing FHA loans. These include:
High Back-End Ratio – This ratio is calculated based on the summation of all your debts. This amount is then expressed as a percentage of your gross income. Debts include your mortgage payments and other debts, such as auto loans, credit card payments, student loans, and more.
You may get approved for an FHA loan with ratio as high as 50 percent.
High Front-End Ratio – This debt ratio factors your monthly mortgage payment. This includes the principal, interest, insurance and taxes. This value should not exceed your gross monthly income. Lenders may allow your mortgage payment to represent as high as 40% of your gross monthly income.
High LTV Ratio – This ratio expresses the Loan-to-Value percentage, which is the ratio of your loan to the value of the home. For instance, some borrowers may have an LTV of 80%. This means you have been loaned an amount that is 80% of the home’s appraised value.
Typically, lower LTVs make you more attractive to lenders. This signals reduced risk to lenders because you don’t require as much money. However, some FHA borrowers can have an LTV as high as 90% or above.
This is particularly helpful for people with diminished financial health.
Reduced Credit Scores – Your credit score can range from 500 to 579 if you make a 10% down payment. You can even get approved for an FHA loan if you have undergone a bankruptcy or have been foreclosed. It all depends on the lender and other financial indicators.
Assumable Mortgage – An assumable mortgage is any loan that can be assumed by the buyer of your home. If you have poor credit or financial health, your FHA loan can be assumed by a buyer. However, if the buyer defaults you may still be held responsible.
These are some of the top advantages of FHA loans. Of course, there are also notable downsides to having such mortgages. Firstly, consider how much you are borrowing. The more you borrow, the more interest you may have to pay.
You should also consider the strict property guidelines and requirements. Your property must meet certain safety and security measures. It may be hard to get an FHA loan for a fixer-upper. You might have trouble getting such a loan for a condo.
You will also have to pay two insurance premiums. The first is either paid up front or financed into your mortgage. The other is a monthly payment.
FHA Mortgage Insurance
With FHA loans, you do not pay the typical premium mortgage insurance (PMI). Instead, you have to pay (1) the Upfront Mortgage Insurance Premium (UFMIP) and (2) the Annual MIP. The values of these premiums depend on your mortgage size, the mortgage duration, and other financial factors.
UFMIP — This is a one-time upfront monthly payment. It doesn’t matter what your credit score may be. You will be required to pay a premium of 1.75% on your home loan. This amount can either be paid upfront or be rolled into the mortgage.
Annual MIP – This is a monthly charge calculated into your mortgage payment. The amount is a percentage of your loan amount, factoring your (LTV) ratio, loan amount, and loan duration.
Your insurance payments may continue for a lengthy period. It mostly depends on your LTV ratio when you began the mortgage process. You will have to pay mortgage insurance for the entire loan term if your LTV was over 90% when your loan originated.
If the value was at or below 90%, your ending date will vary. In this case, you will have to pay mortgage insurance for either the entire mortgage term or for 11 years, whichever comes first.
Getting the FHA Loan Right For You
Overall, FHA loans offer a number of advantages and disadvantages, depending on your needs and goals. Generally, FHA loans have easier qualifying criteria and allow lower credit scores and down payments. Moreover, your insurance premiums remain constant.
However, FHA loans do increase costs as you go. Upfront and annual insurance costs increase your total loan amount and monthly payments. You will typically have to either pay off the premiums in full or refinance with a conventional loan.
If you have any questions about qualifying or receiving FHA loans, contact Latitude Financial today.
