FHA loans are back!

FHA loans are back in a big way

Posted by Kerry Riley on Tuesday, May 18, 2010
Since the death of 100% financing loans, FHA loans are back again and in increasing numbers as the the most attractive financing available.

FHA or Federal Home Administration loans have been around since 1937 as a way to promote home ownership through a loan guarantee program administered by the U. S. Department of Housing and Urban Development.

Basically, the federal government guarantees repayment of loans made by private lenders to qualifying individuals. The government acts as insurer on loans made under the program so the lenders have less risk and can allow just a 3 1/2 % down payment for a home mortgage.

This is the best deal around for anyone buying a home with little money to put down and struggling to get into that first home, or move up buyers strapped for cash but can afford the monthly payment and have decent credit. The FHA loan program is eligible for home purchases up to $ 535,900 in the Richmond area.

Who’s eligible?
Those persons with a credit score of at least 600 or higher with a qualifying income to debt ratio of 29/41%. What does that mean? The total loan payment for the house including taxes and insurance can’t exceed 29% of your monthly gross income, and this total housing payment plus your loan payments (credit card, student loans, auto loan..etc) can’t exceed 41% of your monthly gross income.

What about credit and other qualifying?
Generally speaking your credit score should be at least a 600 or better and your credit report should show a good pattern of borrowing and repaying loans. If you have no established credit, FHA allows for alternative means of proving credit worthiness with things like utility bills and the like.

Bankruptcy Chapter 13 is okay subject to certain conditions, and a Chapter 7 liquidation is okay, if you are two years past the discharge date. Even a foreclosure is okay if you are three years past the settlement date. Note that in these cases you need to have reestablished credit and kept up a good credit history after these events.

Even late payments and collections can be okay if a good pattern of credit is evidenced by your credit report and letters of explanations of the circumstances surrounding bad credit (medical bills, illness, loss of job..etc). The exceptions are federal debts such as taxes and student loans. These must be in good standing.

What about loan fees and closing costs?
The borrower using an FHA loan can negotiate with the home seller to get a 3% contribution towards their closing cost. These are the costs associated with getting a new loan and paying for recordation, attorney’s fees, etc. A 3% seller contribution should be sufficient to cover these costs.

A good strategy for negotiation in buying is to press the seller to pay the closing costs with a reasonable offer on their home. As long as the asking price is fair, as evidenced by a Realtors market analysis and an appraisal, it may be better to get a concession for the closing costs, then, the 3 1/2% down-payment would be all they need to close.

This strategy is only good in a market where sellers are willing to pay a concession for closing costs. Now is a good time for buyers to negotiate as inventory levels are still high and sellers are more competitive. This will not always be the case.

So, if you are renting or want to move up, set your monthly goal to save enough to cover 3 1/2% of your dream home’s value. For example: if you could save around $ 8,000, and negotiate to have the seller pay the closing costs, you could get a home in the $220,000 to $ 230,000 range, and have a payment around $ 1,200 to $ 1,400 per month.

If you are already paying rent in that range, then what are you waiting for. FHA also allows for gift funds to cover the down-payment. Be extra nice to that rich uncle at the next family picnic.

Interested? Check out the government’s webpage at HUD.org and follow the links for FHA loans for all the details, and check with your local lender and Realtor.