Man, I have heard this question a lot lately: Are you sure that an FHA loan would be right for me? I can tell you without a doubt that FHA is a wonderful program and it's completely different from the way its reputation says it should be.
Like all government programs, FHA is brought to you by the US Department of Housing and Urban Development. After the great depression was over, there was a great void in the way that new or first-time homebuyers could afford a new home. By the end of the second World War, the FHA loan was in place. Many of returning veterans and their families utilized this program and changed the way America lived. No longer would renting be the only option. The middle of the 1950's, homeowner's out-numbered the renters.
Before the FHA program, a typical homebuyer would need to pay at least 20% down or more and ask the nearest savings and loans bank to provide the mortgage. The savings and loans bank would ask for some type of collateral in addition to the house. Many times the collateral could not be found; many times the collateral consisted of a relative's house. If the loan defaulted or could not be repaid, both homes were foreclosed upon by the savings and loans bank. This was a major reason why the depression was as severe as it was.
But that was the past and this is the present. You may not know that you can have a mortgage if your credit score is above 580 with FHA. You don't need a home inspection but it is highly recommended. You won't need a roof certificate indicating how long the roof will last. Finally, the seller does not have to pay for the buyer's application fee anymore.
Let's break this down a bit: Since March of 2008, if your credit score were below 680, you will be expected to pay a higher interest rate or pay points to achieve the market interest rate. The average credit score in Delaware is 668 and in Pennsylvania 667: this will have a major impact on whether a first time homebuyer could afford the new mortgage payments in our areas. As stated above, an FHA loan does not use the credit score when determining your interest rate so long as it's above 580. You can have the same rate as someone who has a 725 credit score!
If you are placing less than the required 20% down, the loan will require you pay a monthly private mortgage insurance premium. This premium is paid through your monthly mortgage payment and is used to protect the mortgage lender in case you fail to make your mortgage payments. Since the mortgage meltdown occurred last summer, private mortgage insurance companies have cut back on the programs that they offer and some of those programs that are left require a higher monthly mortgage premium.
Under the FHA program, you will still have to pay a mortgage insurance premium. On a monthly basis, that premium is set dramatically lower than a conventional mortgage. This is the cheapest and best route to take if you are a first time buyer no matter what your credit score! Especially if all you can afford is the bare minimum as a down payment. Yes, there is a down side: you will also have to pay part of your mortgage insurance premium upfront on the day of settlement. This is typically 1.5% of the loan amount. But don't fret because this upfront premium can be 'rolled' in to your mortgage and you can finance this over the life of your loan. If you pay off the loan early or refinance, some of this upfront premium will be refunded back to you as an unused premium from FHA.
For a first time homebuyer or any homebuyer with limited means to provide a significant down payment or may be slightly credit challenged, the FHA program is a wonderful way to purchase your dream home.
There are some rules that will have to be followed. Your combined monthly obligations including your new mortgage payments and all of your other debts should not exceed 41% of your monthly income. Sometimes this is allowed to go higher depending upon your overall credit scores and risks but not by much. If you have any collections or judgments, pay them now before applying for a mortgage. It is a must to pore over your credit report from all three credit bureaus. Call upon any fraudulent account or error and get a letter showing that this debt is not yours. Make sure that any collections you have paid you also receive a letter from that company showing that the debt is paid in full. Your mortgage officer will need all of these letters.
If you have any questions about this program, please feel free to email me at Christopher.Cox@prufoxroach..com.
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