Step into Your New Home Affordably with an FHA Loan

With an FHA loan you will find that you don’t have to pay as much in closing costs as you would if you were closing with a conventional loan. Why is this? It’s simple, actually. With an FHA loan there are restrictions and limits on what sort of costs can be added into the closing costs. What this means is that the lender, the broker, and the realtor do not have carte blanch to charge you for anything and everything that they can think of so they can make more money off of your purchase. Instead, they have to keep things honest and legit and the restrictions and limitations ensure that you are only paying what you are obligated to pay, and nothing more. These limitations can help you reduce closing costs from the tens of thousands of dollars to just two or three thousand dollars!

In addition to the limitations on closing costs, the FHA also allows for the seller to contribute as much as six percent to the borrowers closing costs. What this means is that if you are working with a seller who really wants to sell their home and they want to make it as quick and painless as possible, they can kick in some of their profits and help you pay for the closing costs. So, if you had closing costs of $6,500 and the seller wanted to contribute six percent of the costs on a $100,000 home they would be paying $6,000 of your closing costs so you would only need to pay $500 in closing costs. Many buyers will not contribute this much but they will offer four or four and a half percent or something like that.

What is different about this is that when you are working with a conventional loan the seller is limited to contributing 3% to the borrowers closing costs. You would be surprised how many sellers are willing to contribute more than the 3% to the buyer when they are able because they just want to get the home sold and they want to be done with the whole process of selling their home. Being able to accept these contributions of more than 3% from the seller can help to make the purchase of a new home much more affordable for the average home buyer. The difference between the three and six percent is $3,000 and at the end of the day that is a lot of money when you are trying to keep the costs of your FHA loan to a minimum.

Information Needed to Apply for an FHA Loan

When you have all of the information that you need ready to submit to a lender or mortgage broker you will find that applying for your FHA loan is much easier. Many people find that the process of applying for a loan is a struggle and that is because they were not prepared. Knowing what you need will allow you to go into the process much more prepared and therefore will allow you to make fast work of the application process.

The first thing that you will need to provide a mortgage broker with is your full legal name and the legal name of anyone that you are going to have on the loan with you. Second to this information you will need to provide information that will help the lender to identify you apart from all those that share your name, so you will need to provide your date of birth as well as a tax payer identification number or a social security number. This basic information will get the ball rolling but then you will need to provide you physical address, information on your employment, and also your financial information.

When it comes to your financial information you may be required to provide proof of your income in the way of a paycheck stub, you may need to provide bank statements, and you may also be asked for the previous year’s tax documents. This information allows for the lender to determine if you meet all of their requirements for lending and also allows for them to look at the bigger picture, because they have to assess their risk when it comes to lending you money.

If you have poor credit you may also be required to provide them letters of credit, which are letters from other creditors that state that you have an had account with them and that your account remains in good standing. These letters are not difficult to get and you can usually get them from your credit card companies, the companies that provide you with your utilities and any credit agencies that you work with for things such as auto loans. These letters of credit often help to support your credit worthiness despite a limited or challenging credit past.

You may also need to provide your drivers license number to a lender and all of the information above may need to be given to the lender in hard copy form or at least faxed for their use. If you gather up all of this information before you apply for an FHA loan you will find that you can simply pull out the requested items and mail or fax them to the appropriate people. This will make the application process go a lot more smoothly and in the end may allow you to get your FHA loan much more quickly.

Finding an FHA Loan

You may be wondering where you find an FHA loan and the fact of the matter is that you probably will not have to look far. If you open your local yellow pages you will likely find page after page of mortgage broker or lender listings and you simply need to call a few and see what they can do for you. One of your first questions should be if they originate FHA type loans, because you may be surprised to learn that not all lenders are willing to do this type of loan, and that is their prerogative.

If you are a bit hesitant about doing work with just any mortgage lender or broker there are a couple of different places that you can go to get some more personal information. First, you may want to ask your friends and family members which mortgage brokers they did business with. This is a good idea because your friends are likely to give you a lot of great information and put you in contact that can really help you. In addition, your friends and family members may tell you people or businesses that you want to stay away from, which can save you time, money, and stress.

If you don’t have any friends that can help you with finding a broker that will get you the FHA loan that you need, you may want to talk to your realtor. Many times realtors have great working relationships with a variety of brokers and when you ask your realtor they will be able to put you in contact with the people that they have had the best experiences with, which may mean that you may save some time and stress by limiting how much you have to shop around.

When you finally are put in touch with the FHA loan provider you may be surprised when they offer you other loan programs that will work for you. You should listen to what they have to offer, because just because that you thought one type of loan program was the best for you doesn’t necessarily mean that there isn’t something out there that is better for you. Don’t be afraid to ask questions about the pros and cons of each type of loan and remember that at the end of the day, it is your choice to choose between the different loan programs that you qualify for. There are a lot of great opportunities out there and while the FHA programs work out well for a large number of people, you don’t want to assume that this is the best option for you when there are other things for you to consider that may allow you to buy or refinance a home more comfortably.

1.  EMPLOYMENT – FHA or HUD do not have a required minimum length of time a borrower must have held a position of employment, but do require the lender to verify a two year employment history.  Any gaps in that history longer than a month must be explained.  FHA will make allowances for seasonal employment if you provide a note of explanation.

2.  GIFT FUNDS – If you don’t have all the down payment and closing costs required to qualify for a loan, you are allowed to use a gift from someone to make up some of the difference.  It must be verified with a gift letter from the giver.  The person who is giving you the money must be a “blood” relative, employer, or acceptable charitable agency.

3.  MATTRESS MONEY – You must account for the down payment and any other money to be used to close the loan, such as closing costs and prepaid items (taxes and insurance payments).  If you don’t have the money in the bank, you can say you are going to use cash money you have on hand or at home.  If you do, they may require you to explain how you were able to save the money and what period of time it took to accrue the funds.

4.  JUDGMENTS – If you have a judgment against you and it’s on your credit record, you can still qualify.  However, you must have ether made arrangements with the court judge to make payments and be able to verify 6 months of on-time payments or the judgment must be paid off.

5.  CLOSING COSTS – FHA allows the seller in a transaction to pay up to 6 % of YOUR closing costs.  You can even include some of your prepaid items if they are listed as closing costs.  Ask your real estate agent about including this in your offer to purchase.

6.  FICA SCORES – You don’t have to have perfect credit to get a good loan.   You must have a credit score (FICA) of 620 to qualify for an FHA loan.  If your score is low, be prepared to pay more money down and a little more interest on your loan as a penalty for having the low score.  This is because your loan will be considered a higher risk.

7.  COLLECTIONS ON YOUR CREDIT REPORT – You can still qualify if you have a few creditors who have turned you in for collection and they (FHA) won’t require you to pay them off, EVER!

8.  DOWN PAYMENT – FHA’s minimum down payment is now 3-1/2%, however the more you put down, the more likely you will be to qualify.  Keep this in mind if you have more than just a few credit problems.

9.  OTHER UP FRONT COSTS – In addition to your down payment, FHA requires you to prepay some of the mortgage insurance (MIP) at closing.  That cost is 1.75% of the loan amount.  They DO NOT require this if your loan is 90% or more of the sales price, so you can save if you put 10% down.

10.  RESERVES – FHA does not require you, as do some other loans, to have two or three months payments in addition to the costs of closing the loan, in reserve in the bank.  However if you do have extra money left in the bank, you are more likely to get qualified.

I hope this little guide has helped you in you quest toward homeownership, my very best wishes to you on your search.

FHA Loan Options

The most common type of FHA loan is the fixed rate mortgage, also known as section 203 (b). These loans have the same interest rate and it does not change during the term of the loan. This type of loan insures the lender for the total amount of the mortgage in the case that the buyer defaults and requires a smaller down payment on the loan than a conventional mortgage would typically require. When you get a fixed rate loan of this type you can anticipate having to put down about three percent of the total amount that is being borrowed. Many borrowers like the fixed rate option because it offers them the same interest rate, and therefore the same monthly payment, for the entire term of the loan. With the fixed rate option you can choose between 10, 15, 20, or 30 year terms.

For those that don’t find the fixed rate FHA loan option appealing they may want to look into the adjustable rate mortgages, also known as Section 215. The adjustable rate mortgages or ARM’s are a great deal for those that are looking for a very low interest rate in the beginning. If you are only going to live in the home for a few years this can be a great option because you can take advantage of very low interest rates, which will keep your monthly payment lower than it would be if you had purchased the same house at a fixed interest rate.

The Federal Housing Administration also has a couple of great programs such as the Teacher Next Door and Officer Next Door FHA loan programs. These programs are extended to teachers in the United States as well as police officers. If the home is financed with an FHA loan the teacher or officer is only required to put a $100 down payment on the home and they receive a 50% discount. The program is part of the Housing and Urban Development program and it can help teachers and police officers in many areas of the country to buy a home for the first time, especially because it is known that teachers and law enforcement offers are not all that well paid based on what they do for a living. Not all homes will qualify for this program, only homes that have been acquired by HUD will qualify, but there are some really great houses out there that teachers and police offers can purchase for very little and with very little out of pocket at move in.

As you can see, there are different loan options offered by the FHA so that just about anyone can get into a home and experience the pride of home ownership. If you have always believed that you could not buy a home you may want to look into one of these loan programs. There are many mortgage brokers out there that would love to help you buy a home.