Experience Homeownership with an FHA Home Loan
Getting a home loan is not always an easy feat, and current market conditions are making it even more difficult. People with lower incomes, including first-time homebuyers, often can’t afford or even get approved for a home loan. So what are the options? For individuals who need a little extra help, an FHA home loan can help you experience homeownership.
How does an FHA loan work?
FHA loans have been helping people obtain homes since 1934. These mortgages are backed by the government under the U.S Department of Housing and Urban Development’s Federal Housing Administration. However, the FHA does not provide the loan. The loan is obtained from a private lending institution, such as a bank, mortgage company, savings and finance business, etc.
Essentially, the FHA just insures the lender that they will not experience substantial loss if the borrower cannot repay the loan amount. Keep reading to get the inside scoop on California FHA loans.
What do I need to do?
The first step is finding a lending institution that has an FHA program. Comparatively shop for the lowest interest rate and the best terms to suit your situation. The U.S Dept of Housing and Urban Development website can help you find FHA lenders and link you to the local FHA offices. Their local office will also be listed in the phone book.
Once you apply for an FHA home loan, the Federal Housing Administration will examine your application for the following items: your income to debt ratio, how (and if) you paid previous debts, overall income, number of family members, etc. Bad credit applications will generally be approved if it has been two years since bankruptcy and you’ve made debt payments on time for at least 12 months. If they decide that you meet the qualifications and are an acceptable candidate, they will approve the loan.
What else should I consider?
The maximum amount the FHA loan will insure is 97 percent of the total loan. The remaining three percent will be your down payment and/or closing cost’s. However, there is also a cap on the mortgage amount. The cap will vary per state and depends if the loan is for a one, two, three, or four unit structure. A four-unit structure is the maximum an FHA loan will insure, so keep that in mind when searching for a home.
In addition to the basic FHA loan described above, you can refinance an existing home loan through an FHA loan. You might also want to consider the option to buy a fixer upper and finance the cost of the loan, including repairs, into a single loan. The options are rather vast. Remember that an FHA home loan is a great option for first time buyers, and don’t miss out on other first time home buyer programs.
What are the Benefits?
Besides increasing loan acceptance by private lender, here are some of the more obvious benefits:
- Lower down payment
- Lower closing costs
- Lower interest rates
- Helps for those with little or no credit
- Greater leeway for those with a bad credit history
What are the disadvantages?
The FHA mortgage insurance premium is 2.5% of the loan amount. This is the premium “fee” that you must pay at closing, or finance into the loan. There is also an annual premium of one-half of one percent; which is divided, and then added into the monthly note.
Also, the loan process can be very tedious. It may take a while to figure out which type of loan to apply for and meet all the qualifications before getting approved. There are stringent guidelines for qualifying the property for an FHA home loan, and the specific specs and qualifications will vary per state and area. So make sure you are working with someone who is an expert on this type of loan program.
