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fha mortgage

8 Ways a FHA Mortgage Makes It Easy to Buy a Home

By Joe Silver

Since the Great Depression, the US Government has encouraged and insured Americans to buy a home with the FHA mortgage program. People who have average or poor credit may think that they are shut out of buying their dream home. They are often wrong. With an FHA home mortgage, you can stop paying rent and buy a house sooner than you think.

FHA mortgages are very popular today because the standards for getting a mortgage are quite flexible, much more so than conventional mortgage loans.

If you have had past credit issues, you should learn more about FHA mortgages to see if they are right for you. Below is more information about how to buy a home with an FHA mortgage:

Find an Approved FHA-Mortgage Lender for Your Area

The Federal Housing Administration or FHA helps people with past credit and income problems to buy a home by providing a guarantee on the FHA mortgage. If the buyer defaults on the home loan, then the FHA will pay back the lender the principal on the loan.

Therefore, many mortgage lenders want to lend money for FHA mortgages. The risk to the lender is minimal if a person with a lower credit score and income were to default on the mortgage.

To get an FHA mortgage loan, you just need to ask around your area or check online for approved FHA mortgage lenders for your state or city. Keep in mind that not every lender works with FHA, so it pays to ask around.

Also remember that different FHA lenders may have different rates and fees, even for very similar mortgage programs. So you should talk to at least three FHA-approved lenders to score the best deal.

Save for a Down Payment

The days of getting a 100% finance loan are pretty much over, unless you can qualify for a VA loan. However, one of the best aspects of the FHA mortgage program is that you can get a loan in many cases with only 3.5% down.

If you are purchasing a $100,000 home, you only need to put down $3500, plus closing costs of course.

So, while you do have to put some money down, you can get into a home with a much smaller down payment than you otherwise might.

In most cases, you will need to have a credit score of at least 580 to qualify for a 3.5% down payment; otherwise, you likely will need to put down 10%. In rare instances some FHA lenders may approve FHA mortgages if the borrower has very strong credentials that compensate for the low credit scores.

Assume an FHA Mortgage Loan

One of the benefits of an FHA mortgage that few know about is that it is assumable. Let's say you find your dream home, and you discover that the current owner has an FHA home mortgage.

If you qualify for the loan financially and credit wise, you can 'assume' the FHA mortgage already on the home. You can save yourself a good deal on closing costs and fees if you are able to assume the current mortgage.

You must be able to meet the underwriter's income and credit requirements as usual with any loan.

Front End Ratio of 31%

If you want to get an FHA mortgage, the underwriter will generally require that your front end ratio, which is your mortgage payment plus taxes, fees, mortgage insurance and home owners insurance, should be less than 31% of your gross monthly income.

However, some underwriters may approve you for a ratio as high as 40%. The lender has to provide a justification for why they think the higher risk is acceptable in this case.

Back End Ratio of 43%

Your back end ratio needs to be less than 43%, which includes all of your monthly debt payments. But some people can get approved with a ratio as high as 50%.

You should check with various FHA approved lenders if you have ratios that are higher than the ideal FHA standard.

Have At Least a 580 FICO Score

If you want to qualify for a 3.5% down mortgage, you will need to have a credit score of 580.

You can theoretically get approved for a FHA mortgage application with a 500 credit score, but you will need to put more down. And, you will have to shop around to find an FHA-approved lender who will work with you.

If you do not have a 580 credit score, you will need to put down more money.

Be Out of Bankruptcy At Least Two Years

Bankruptcy is not a big problem with a FHA mortgage. But you will need to wait at least one year and possibly two years after the bankruptcy is finalized. You also must show that you have reestablished credit and are paying your bills on time.

Be Three Years Out from a Foreclosure

Foreclosures on your record are not a big deal either, but you will usually need to be three years out from the last foreclosure. Some exceptions may be made, especially when you show that you have reestablished your credit.

The Bottom Line

You can usually qualify for an FHA mortgage loan, as long as you demonstrate that you have the income and stability to indicate that you are a reasonable risk for the FHA finance company. Follow the above tips to maximize your chances of buying a home with an FHA mortgage.

 

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