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What is a FHA Loan?

Date: February 8, 2015       Author: Citirah Harris

There are acronyms for everything in housing. But we are going to focus one we are sure you’ve heard of  “FHA loan” or “FHA approved,” at some time or other.  Maybe on HGTV or on one of those flyers you picked up at an open house. It’s pretty simple, really. The government (Federal Housing Authority) insures loans for approved lenders to reduce their risk of loss if the borrower defaults.

 

 Today, FHA loans are popular with first time home buyers for a couple of reasons:

  • They require a low down payment (3.5 percent  as opposed to the traditional 20 percent).

  • You don’t need perfect credit. (With maximum financing and a minimum down payment, a score of 580 will do.)

  • They can be “assumable” (a new buyer can take over the existing loan – a good deal for the buyer, especially when the rates are below the current market).

     Typical FHA loan requirements:

  • Steady employment history

  • Valid social security number

  • Lawful US residency

  • Must be of legal age to sign a mortgage (differs by state)

  • Your front-end ratio (mortgage payment + HOA fees + taxes +mortgage insurance + home insurance) must be less than 31 percent of gross income.

  • Your back-end ratio (mortgage payment + monthly debt payments – incl. credit card, school, and car payments) must be less than 43 percent of gross income.

  • Property must be appraised and approved by an FHA-approved appraiser (for condos, the entire development must be approved)

 

 

KEEP THIS IN MIND

Maximum loan amounts vary by state and county. Also, the borrower pays two mortgage insurance premiums. One must be paid upfront – currently, it’s 1.75 percent of the total loan (for those cases signed on or after April 9, 2012).

 

The other is paid annually, though it’s figured into the monthly mortgage payments.  The amount of that one depends on the loan-to-value ratio, the size of the loan, and the length of its terms – it’s typically between 0.70 and 1.30 percent.

 

This is some great information and should get you excited about your chances of owning a home sooner than later. So when you think FHA, focus on these key things. 580 credit score and 3.5% down.

6806 Paragon Place #300, Richmond, VA 23230, Phone: 804-282-5901