Find out what an FHA loan is, who qualifies for one, and the pros and cons of 3 different kinds of FHA loans. Get the Money Girl book at http://MoneyGirlBook.com
Money Girl
335 MG Do I Qualify for an FHA Home Mortgage Loan?
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But did you know that even if you're struggling to save money for a down payment, or you don't have great credit, you may still get approved for an FHA loan. In this episode, I'll tell you what an FHA loan is, who qualifies for one, and the pros and cons of getting three different kinds of FHA loan products. And one more thing before we get started. I'll be teaching an upcoming webinar called Understanding Financial Statements, a step-by-step tutorial. Reading financial statements is a skill that can help you run your own business or advance your corporate career. The next Money Girl newsletter will have more details about the course. So if you're not already subscribed, be sure to sign up on the Money Girl page at quickanddirtytips.com. Hope to see you on the webinar. Many people have heard of an FHA loan, but aren't sure exactly how it works. An FHA mortgage is a loan that's insured by a government agency called the Federal Housing Administration, or FHA. The FHA ensures loans that meet certain requirements and may apply to a variety of properties, such as single-family homes, multifamily homes, and manufactured homes. The FHA doesn't actually make loans to consumers. Instead, it provides insurance to FHA-approved lenders, so they feel comfortable making a loan to a somewhat risky borrower. Having FHA insurance protects lenders and reduces their risk of loss if a borrower defaults and doesn't make their loan payments. The FHA program is funded by homeowners who pay the mortgage insurance, not by taxpayers. I'll tell you more about those costs in a moment. Having insured over 34 million properties since 1934, the FHA is the largest mortgage insurer in the world. But not everyone qualifies for an FHA loan. You must be a legal resident of the United States, have a valid Social Security number, and demonstrate steady employment for at least two years. You also must meet certain financial requirements. The total cost of the home, including the mortgage payment, mortgage insurance, property taxes, home insurance, and any homeowner association fees must typically be less than 31% of your gross income. Additionally, the total of all your debt must typically be less than 43% of your gross income. While you don't need good or even average credit to qualify for an FHA loan, you can't have extremely poor credit either. However, in some cases, you can compensate for a low credit score by making a higher down payment. You can even get approved if you've had a bankruptcy that's over two years old or a foreclosure over three years old if you've reestablished good credit. Exceptions can be made by lenders depending on your circumstances. The property you're buying or refinancing must also pass inspection by an FHA approved appraiser. If it doesn't meet minimum FHA standards, either you or the seller must agree to make the required repairs. There are many different types of FHA loans, including programs for first-time homebuyers, disaster victims, energy-efficient renovations, condominiums, refinancing, and even urban renewal projects. But here, I'll focus on just three types of FHA loans that you might use to purchase or refinance a principal residence. These are called the 203B home mortgage loan, the 203K rehabilitation mortgage loan, and the short refinance mortgage. So the first one, the 203B home mortgage, is considered the centerpiece of FHA's single-family program. It was designed to help Americans who wouldn't normally qualify for a conventional mortgage by a refinance a primary residence. There are three major benefits of a 203B loan. One is your down payment, it can be as low as 3.5%. Most conventional mortgages, on the other hand, require you to pay 5 to 20% of the price of the home. The second benefit is that your fees are limited. There are caps on some of the fees that mortgage lenders can charge. And the third is you don't need excellent credit. As I previously mentioned, you may get approved even if your credit has a rocky past. The amount you can borrow with an FHA loan has limits depending on where you live. For more information, you can search by city, county, or state using the FHA mortgage limits tool. I'll put a link to that resource in the transcript for this show on the MoneyGirl page at quickanddirtytips.com. The second FHA loan we'll cover is the 203K rehabilitation mortgage. This one allows homeowners and home buyers to finance up to $35,000 for repairs or upgrades. This program gives you cash to pay for improvements, such as necessary repairs found by a home inspector or an FHA appraiser. For instance, if you're a homeowner, you could use the funds to prepare your property for sale. 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Walmart plus, it's Walmart plus free delivery, which saves members time plus money. Yep, plus an included Paramount plus subscription to stream movies, shows, sports, and that can't miss documentary plus Burger King savings. That's right, members get 25% off Burger King digital orders. Every day of the week. Walmart plus, it's Walmart plus. Become a member at walmartplus.com. $35 order minimum. Paramount plus essential plan only. Separate registration required. Valor de participating USB case in the BKF or BK.com for members only. 25% off one time per calendar day. Terms apply. See Walmart plus terms and conditions. And the third type of loan we'll cover is the FHA short refinance mortgage loan. This is designed for homeowners who are underwater, which means you owe more for your mortgage than your home is worth. To qualify for the FHA short refinance, you must be current on your existing mortgage payments. You have to occupy the property as your primary residence. You can't have poor credit, nor a history of certain kinds of criminal activity, and you must have a loan that isn't insured already by the FHA or VA, which is the Department of Veterans Affairs. Here's how the short refinance works. Your existing lender must agree to forgive some of your debt, so you owe no more than 97.75% of your home's current value. For instance, let's say your home is worth $300,000, but your outstanding mortgage balance is 325,000. If your lender is willing to reduce your debt from 325,000 to 293,250, which is 97.75%, then you may be eligible. The FHA would pay off your existing loan at the discounted balance and issue you a new FHA loan. For more information, contact your existing lender or any FHA approved lender, and I'll have a link to FHA approved lenders in the transcript for this show. Everything I've mentioned about FHA loans sounds great, so what's the downside? Well, the major con is that an FHA loan may cost more than a conventional mortgage. You typically have to pay both an upfront and an annual mortgage insurance premium, which is called MIP for short. An upfront MIP costs 1.75% of the home loan. For instance, if you borrow $300,000, you must pay $5,250. This amount can be paid in full upfront or added to your mortgage balance. This MIP applies no matter your loan amount or term. The other expense is the annual MIP. This is divided by 12 and added to your monthly mortgage payment. It could range from less than one half of a percent up to the current maximum of 1.55%. The amount and how long you have to pay the annual MIP depends on the originating date of your loan. The amount and your loan-to-value ratio. The bottom line with an FHA loan is that it's loaded with hefty mortgage insurance premium fees. However, because of that insurance, lenders may offer lower interest rates and much more flexible qualification requirements. But not all FHA-approved lenders are alike. They may offer different rates and fees even for the same loan. So be sure to compare what you would pay for an FHA product against the cost of a conventional loan. Paying for a mortgage may be the largest expense of your life. So before you sign a mortgage commitment, shop around, ask different lenders lots of questions and make sure you're getting the best possible deal. If we haven't connected on social media yet, please visit Facebook and do a search for MoneyGirl. On Twitter, you'll find me under User Name at Laura Adams. Everything I've mentioned is on the MoneyGirl page at quickandertietips.com. Read a transcript of this show, look for episode number 335, called "Do I qualify for an FHA home mortgage loan?" I'm glad you're listening to Ching. That's all for now. Courtesy of MoneyGirl, your guide to a richer life. [MUSIC] It's Walmart Plus, free delivery, which saves members time plus money. Yep, plus an included Paramount Plus subscription. 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