When you're ready to buy a home, you'll discover a wide variety of loan programs. However, if you have less than perfect credit or a limited amount of money available for a down payment, your options become limited. Federal Housing Administration (FHA) loans are one of the easiest loans to qualify for, because down payments and credit score requirements are much lower than conventional home loans. Below are some general requirements to better understand how these loans work.
What Is an FHA Loan?
The FHA is a branch of the U.S. Department of Housing and Urban Development and offers government-backed mortgages. While the FHA insures these loans, it isn't the lender. Home buyers get FHA loans from FHA-approved lenders. However, because the FHA guarantees these loans, these lenders are often willing to approve borrowers they might not otherwise consider. To qualify for an FHA home loan, you must meet certain credit score and down payment requirements, show proof of employment and steady income and have a favorable debt-to-income ratio that includes your estimated mortgage payment. Plus, the home you wish to purchase must pass an appraisal performed by an FHA-approved appraiser.
Credit issues or less than stellar credit doesn’t necessary disqualify from obtaining an FHA loan, however your down payment requirement will increase. If your credit score is 580 or higher, you may qualify for an FHA loan with a down payment as low as 3.5%. However, if your score is between 500 – 579, you’ll be required to pay at least 10% down. You're generally ineligible for an FHA loan with a credit score under 500, but allowances may be made under certain circumstances, when you meet other criteria.
Down Payment Requirements
Many conventional mortgages require 20% down. FHA mortgage applicants may qualify for down payments as low as 3.5% -- the minimum amount required. However, your down payment hinges on your credit score, and increases as your score decreases. You can pay your down payment from your savings, but it can also be a financial gift from a family member. You can also receive down payment assistance from government grants or city, county or state housing authorities or nonprofit organizations.
Your total closing costs vary based on your state of residence, size of your loan and whether you paid points to lower your interest rate. However, FHA-approved lenders aren’t allowed to charge more than 3% to 5% of your loan amount for closing costs. FHA requirements define which closing costs are allowable and the amounts deemed reasonable. The FHA also allows the home seller, builder and/or lender to pay some of your closing costs.
Mortgage Insurance Requirements
Because FHA loans require less than 20% down, you’re required to pay mortgage insurance. This insurance protects lenders from loan defaults. The FHA requires both upfront and annual mortgage insurance, regardless of the amount of your down payment.
Upfront mortgage insurance is a percentage of your loan amount and one-time premium paid when you close on your loan. However, you’re allowed to roll your upfront premium into your mortgage, which increases your monthly payment.
Annual mortgage insurance is also a percentage of your loan amount, but this percentage varies based on loan amount, loan term (length of loan repayment, usually 15 or 30 years) and initial loan-to-value ratio (loan amount divided by the appraised value of the home). Annual insurance is actually charged monthly, so the total amount is divided by 12 to determine your monthly payment. This amount is added to your mortgage payment for one total payment each month.
If your loan-to-value amount was greater than 90% when you signed your loan, you’re required to pay annual mortgage insurance the entire loan term. If your loan-to-value was less than 90%, you pay mortgage insurance for the loan term or 11 years, whichever comes first.
The FHA adjusts its loan limits annually to set a minimum and maximum amount they will lend on any given loan. These limits are influenced by shifting home prices and conventional loan limits. Maximum loan amounts are usually slightly higher than median home prices in a specified area. Thus, the amount can vary from state to state and even county to county. Cost of living in a specific area and special exceptions for areas with higher home construction costs can also affect these limits.
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People make a lot of interesting decisions when it comes to money, goods and services. Some folks like to keep chickens and cultivate organic gardens to lessen the cost of shopping at supermarkets. Others are quick to place a Craigslist ad to get a little money back for things like old bicycles and unused personal items.
But next to no one considers making deals that run into the hundreds of thousands of dollars without having a lawyer look over a contract. Selling your own home runs along the same lines. It’s a major transaction and these are some of the reasons why it may be best to enlist the help of a professional.
Financial Benefits are a Myth
Some homeowners consider selling their own home to recoup the approximate 6-percent commission real estate agents generally get for their time and efforts. On the surface, that seems like a good idea. Of course, only real estate professionals really know the facts about selling homes.
A real estate professional understands market trends, prices and what drives prices up or down. For example, a 7-room home sounds like it could fetch a good price based on the number of rooms. To the homeowner scanning the listings, that makes sense.
But an experienced agent may be better informed about what people moving into your area want. They may value larger rooms instead of more, or open floor plans. A home-selling professional may recommend taking down a non-load bearing wall to increase value. That may drive your potential sales price far above the 6 percent you were looking to save.
Simply put, an industry professional can help you pocket more money than you might have gotten without their experience.
Professionals are Better at Marketing Homes
The growth in online listings has led some owners to believe that uploading a few pics and specs is all the marketing a home requires. Nothing could be further from the truth.
Many agencies engage in in-house information sharing. That means that agents try to match buyers with sellers by utilizing their internal networks. This has resulted in faster sales for homeowners that work with professionals.
Anyone who has driven by a few “For Sale by Owner” signs recognizes that these properties do not move quickly, or at all. Selling your own home puts you outside the largest marketing network for your product, real estate agents.
Finding a Qualified Buyer can be Impossible
One of the biggest nightmares homeowners that try to sell their properties face is finding a buyer that can get a mortgage.
Once you put that sign in the ground, expect multiple calls from buyers offering rock-bottom prices. Some of these will be home flippers and they can be persistent.
The other major problem will be the ongoing offers from people that simply don’t qualify for a mortgage. Expect solid offers and repeated disappointment.
Real estate agents press perspective buyers to get prequalified and then match their purchase power to your asking price. This will include having a reasonable down payment on hand and a bank willing to write up the deal. That’s professionalism.
Contact an Experienced Real Estate Professional
These are just some of the many problem areas that cause property owners frustration, disappointment and financial setbacks when trying to make a major transaction without professional help. Despite the overwhelming reasons why “For Sale by Owner” is an inherently bad idea, upwards of 8 percent of homeowners make this sometimes-catastrophic mistake. Don’t join their ranks.
If you are considering selling your home, contact an experienced real estate professional.
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For someone thinking about becoming a landlord and either buying a non-owner property or converting their own house into a rental, there are five tips and things to think about before doing so.
The first is to know and follow the rules since landlords must adhere to federal, local and state housing laws and health and safety codes.
The second thing to remember is that unless you hire a property manager, you’re on call 24/7. Emergencies can occur any time of the day and you, as the owner, are ultimately responsible for remedying the problem and providing a livable unit for your tenant.
The third thing to keep in mind is that interviewing potential tenants can be difficult; options include social media to advertise the space, or receiving referrals from friends and family. You may also want to consider using a property manager or property management company. The fourth thing is to assess your ability to fix things when they break. If the unit is not near you, or you are not “handy”, you’re in better shape than having to hire someone as those costs add up.
Lastly, prepare for the unexpected as there are things that will come up that you won’t be able to repair, so having a list of vendors that you can contact when something goes array (cockroaches, A/C breaks), will be beneficial. But once the decision is made to own a rental unit, loan originators have various programs that are similar to owner-occupied programs for financing. And there are some very attractive terms!
The industry is always looking for ways to streamline and finesse the mortgage loan process, and ideally, lenders should start with the very first step—pre-approval. For borrowers, it really does pay to work with a lender who asks the right questions and procures all the appropriate documents, as they’re less likely to make a misstep and stall the process.
A common lender mistake is simply not doing enough research. Even if a buyer has a pre-approval letter from an esteemed mortgage lender, the loan application will be declined if the lender hasn’t looked into tax returns and credit reports sufficiently to find out that the borrower has, for example, already financed the maximum number of properties as dictated by Fannie and Freddie.
Given the importance of credit, many people have their credit report run every year. Although this is primarily to watch for suspicious activities on one’s credit card, knowing your credit score is an important step if considering a home purchase or refinance.
Self-employed borrowers also pose problems when it comes to income, as institutions won’t issue a loan based only on assets. If a borrower isn’t able to demonstrate any income—he or she is starting a new business, for example—the application will be declined, even if the borrower has several million in the bank and a pre-approval letter from a well-regarded lender.
Oversights like these leave everyone with a bad taste in their mouth—the seller loses time in selling the property, and the buyer loses time in searching for a property and has to cover the cost of the appraisal, at the minimum. Time and energy is wasted by all, and the mistakes are entirely preventable if lenders are diligent throughout the pre-approval process.
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