Who Should Take an FHA Loan?
An FHA loan is an instrument that allows you to purchase a home without a tremendous amount of money down. The Federal Housing Administration is not in the business of lending money - what the institution does is to insure lenders against delinquent buyer defaults. The credit terms and conditions of FHA guaranteed loans are slightly more lenient than the terms are for standard conventional loans. You are allotted 29 percent of your total monthly income to pay for mortgage costs and as much as 41 percent to pay for mortgage costs plus other long-term debt to creditors. Compare these rates to the rates you'll find for conventional loans - approximately 26 percent is allowed to pay for mortgage costs and 33 percent is allowed to pay for your total debt plus mortgage costs.
An FHA loan may be able to help you afford a larger home and a better neighborhood, but its powers are not unlimited. You have to have a reasonable credit history and score. You have to have a steady income stream and the paperwork to verify your employment. You have to put down at least 3 percent of your mortgage and to manage other closing costs, such as attorneys fees and insurance. Almost anybody can get an FHA loan. There are no income limits - like you may find with first time home buyer programs. However, there are limits on how much you can borrow.
In general, you're limited to relatively small mortgage loans relative to home prices in your area. To find the limits in your region, visit HUD's Website. To qualify for an FHA loan, you'll need to have reasonable debt to income ratios. In general, you have to be better than 29/41. In addition, you have to have decent credit. You don't need wonderful credit to get an FHA loan; it just needs to be decent. FHA home loans were designed to help Americans fulfill their dream of home ownership and are therefore the easiest type of real estate mortgage loan to qualify for. Among the home loan options available that require a minimal down payment, FHA loans are the most popular.
In fact, the FHA loan is the most flexible type of home mortgage loan to qualify for. The essentials are
- Steady employment history, at least two years with the same employer.
- Consistent or increasing income over the past two years.
- Credit report should be in good standing with less than two thirty day late payments in the past two years.
- Any bankruptcy on record must be at least two years old with good credit for the two consecutive years.
- Any foreclosure must be at least three years old with good credit for the past three years.
- Mortgage payment qualified for must be approximately 30 percent of your total monthly gross income.
Conventional Mortgage Versus FHA Which Should You Choose or Which is Better
Just don't come to the conclusion whether conventional loan or FHA is better for you because first of all you need to qualify for both these types of loans then only you can decide. FHA's carry a lower interest rate but they have high insurance premiums and usually cost borrowers more but if you don't qualify for the conventional loan then you are not left with any other choice other than the of FHA loan option.
Some facts about FHA loans: FHA loans are insured by the Federal Housing Administration and are administered by the FHA approved lenders. They offer easier credit qualifying guidelines then the conventional loans. FHA does not lend money but they guarantee the loan. As these loans are backed by the government thus the lenders are able to offer competitive interest rates. FHA loans are common among first time home buyers and consumers with minimal credit history.
Some facts about Conventional loans: Conventional loans are typically offered by banks and credit unions and usually require a down payment of 20% of the home purchase price and thus do not require mortgage insurance. Conventional loans require tougher credit requirements than FHA loans and you also find that interest rates are lower.
Pros and cons of FHA Loan
- These are government backed loans and require minimum 3.5% minimum down payment
- The other reason of its great going is that the minimum credit score is 500 and thus offer a great option to those who have poor credit but want mortgage.
- In addition to low down payment and lenient credit requirements FHA offers low interest rates and no prepayment penalties
- FHA allows the down payment to be borrowed or received as a gift from a government, friend, relative etc.
- Major disadvantage of FHA loans is its additional closing costs such as 1 percent origination fee and upfront mortgage insurance premium
Keep in mind that FHA loan offerings are also pretty basic as they also offer purchase money mortgage and refinance loans but choices are slim. Moreover most of the borrowers struck with 30 year, 15 year or 5/1 ARM mortgages and if they are looking little different then FHA loan is not for them.
Pros and Cons of Conventional loans
- Conventional loans offer both conforming and non-conforming loans and thus the borrower has many more options to get anything from 1-month ARM to a 30 year fixed loan or anything in between
- Conventional loans are not supported by the government but are offered by the private lenders and thus there is more room for negotiation and thus offer more flexibility
- With conventional loans, borrowers are not subject to mortgage insurance premiums assuming that you put 20% down or have at least 20% equity when refinancing
- Conventional loans are easily available in every bank or lenders and thus you can use any bank to shop for the best deals. Moreover these loans can be used to refinance any property where as some condo complexes are not approved by FHA Financing.
In today's scenario both FHA loans and conventional loans make sense and offer competitive mortgage rates and closing costs so you have to do math to determine which suits you more effectively.