Federal Housing Assistance loans are a popular way for those with less than perfect credit to apply for a mortgage. They only require small down payments from borrowers and are touted as FHA insured against default. The reality is that the borrower actually pays the costs of the mortgage insurance protection as an upfront payment and as a continuing monthly payment.
FHA mortgage loans do have the advantage of being assumable, which means a home owner can pass the mortgage onto a new buyer which has advantages as it reduces the mortgage origination costs to the purchaser. It also protects borrowers from relying on subprime lenders to secure a mortgage. However those considering an FHA mortgage should compare the overall costs and repayments with a conventional mortgage if they would qualify for one, as the mortgage protection premiums are high with an FHA loan.
Firstly the borrower must assess if they meet the criteria for an FHA loan. This will involve analyzing your debt levels as the maximum debt to income ratio allowed is 41%. There are also strict rules in place which prohibit borrowers from taking a loan which will cost more than 29% of monthly income to service. Proof must be provided of this through tax returns.
The Fico credit score is another important consideration and it is important that borrowers are aware of this figure before applying. If it is within the FHA remit your score will affect the amount of the down payment required. Any applicant with a Fico score of less than 580 must make a ten percent down payment, whilst borrowers with a minimum credit score of 580 only need to find a down payment of 3.5 percent.
The down payment can come from other sources apart from the borrower and you may be able to qualify for a HUD assistance grant so it is worth applying to HUD. HUD homes are very much worth considering for low income of first time buyers and one of the methods of financing a HUD home is an FHA mortgage.
The closing costs of an FHA mortgage are usually around 2% of the loan but can be built into the loan. However borrowers should be aware that by doing this they will pay additional interest charges on the fees. Applicants must also be aware of the mortgage insurance protection fee which is a hefty 2.25% upfront fee followed by monthly premiums of 0.5%. Those who qualify for a conventional mortgage will not face such high MIP costs. However FHA mortgages have the advantage of no pre payment penalties.
When you have comparison shopped mortgages which are available to you and then decide that an FHA loan is the best product for your circumstances you can apply. The FHA itself does not issue loans but you should seek out an FHA lender in your local area to work with. It is also wise to get pre approval from the FHA lender before you actually start the business of making offers on properties.