Archive for the ‘FHA Mortgage’ Category

The objective of FHA loans:

The whole idea behind the inception of FHA and the mortgage insurance that it offers was to help the American citizens with an easy financing option, so that they could buy and own a home of their own. Therefore, contrary to several public or private business organizations, the basic objective of FHA is not to derive maximum benefits from the services it offers under any circumstance but to help people buy and retain their home. This objective is reflected through the easy FHA loan requirements.  However, the issue of credit score, missed payments and FHA loan requirements can be explained better by considering the example of foreclosure.

While in this situation, other lenders try to foreclose as early as possible to close the account, in case of FHA mortgage loans, FHA offers several special loss mitigation options in order to save the house. This objective is also reflected in case of potential borrowers with bad credit. These bad credit holders are also given FHA loans, which is basically an opportunity to improve their credit.

Issues related with Credit ratings/score:

Your credit score is not so big an issue in the case of FHA loan approval. If you have a poor credit rating even then you should not worry since FHA loan requirements are much more liberal and relaxed than that of other loans such as conventional loans.

FHA considers the fact that the past credit score need not be the true reflection of one’s present creditability. All you have to do is to prepare a credit statement of your credit score. This should include all the defaults in your credit account and the reason for the default such as sudden illness or accident etc. You should also include the proofs such as medical bills etc. to support your explanations.

Also, you must show that you are honestly trying to improve upon the rating by being disciplined with the repayments, utility payments, rental payments, insurance payments etc. This will certainly be taken in good note by the FHA approved lenders.

Issues related with missed payments:

FHA is also very liberal in case you have few missed payments and don’t consider you a natural defaulter. But you must be very consistent in the repayment on your own mortgage. You must be paying regularly on your home loan for 12 months prior to applying for FHA loans. So you must be punctual on the repayment of the bills prior to applying for these loans and if you are not, then you must take the necessary steps towards it.

One way to do so is to pay some of the bills and make a settlement with the lender for the remaining payments. You should also close down your unnecessary credit accounts in order to restrict any more defaulted bill payments.

Lastly, you must keep your debt-to-income ratio as low as possible. The mortgage payment should not be more than 29% of the gross income. Also, mortgage payment and non-housing expense together should not be more than 41 per cent of the gross income. There may not be, however, any exemption in the debt-to-income ratio requirement.

Conclusion:

Therefore, bad credit holders must accept the fact that lenders of FHA loans always remain eager to offer loans to all those who are interested. However, it is up to you to show them that yours is a genuine case and that your bad credit score is not due to any intentional defaults but due to reasons beyond your control. You should also show that after the credit score, you have tried to improve your credit by making timely and full payments for all pending bills. Also, lenders of FHA loans are more interested in checking your attitude than what occurred earlier. If you are a natural defaulter you can’t succeed in getting FHA loan but if your credit score was a result of your unintentional mistakes, you can very easily meet all requirements for FHA loans.

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Why should you prefer FHA loans over others?

Even if you meet FHA loan requirements, you should not simply jump to borrow the loan. Because you can use this loan in a more productive way if you know how FHA loan meets your unique needs, which can be better explained by the experiences of other people e.g. People choose FHA loans over traditional loans due to its easy borrowing criteria, low cost, convenient borrowing process etc. In addition, there are several benefits and protections that are innate to the FHA loans, so there is ideally no logic of why one should choose any other option instead of FHA loans. Few of the key features of FHA loans are given below.

Easy borrowing criteria: Since mortgage insurance by FHA makes the loan offered by any of FHA approved lenders most secure and therefore they want to lend as much as possible. At times these lenders look at the genuineness of your problem rather than the documents and therefore it is easy to meet FHA loan requirements e.g. in one of your previous loans you may have not so perfect credit because you delayed in making payments. But the actual problem could have been on your part but on the part of your bank which delayed the payment. Now, even if you were not at fault, your case was counted as delayed payment and so was the bad credit. However, only FHA approved lenders can consider this problem and not others.

Bad Credit is no hindrance: It is said that FHA loans have one or more options for you, in spite of your problems. So, even if you have bad credit or even bankruptcy or foreclosure, you can still meet FHA loan requirements. Therefore, FHA loans offer you an opportunity to improve your credit score, which can’t be offered by any conventional loan.

Least Downpayment: In the case of FHA loans, you have to make a down payment of as low as 3 percent. Even this 3 percent can come from either you or your family, friends, employers or any other source. No other organization accepts this.

On the other hand, with a conventional loan, you have to pay at least 10 percent as down payment, in some cases it is 20 percent. This is the reason why FHA loans are becoming more and more popular among first time home buyers. Even otherwise, if you look at the profile of the borrowers of FHA loans, conventional loans and other loans, you can observe that most of the buyers have good income compared to their expenses. However, they borrow loans only because of one fact i.e. they can pay a small amount every month and they can’t pay a large sum for one month and low down payment policy of FHA loans fits exactly into their payment pattern. Therefore, FHA loans are convenient for repayment.

Cheaper loan: Most of the time, FHA loans have a low rate of interest because the Federal Government insures their loan, which reduces their risk, which in turn results in lower rate of interest. This is not the case with conventional loans.

Helps borrowers keep their home safe: After borrowing mortgage loan, if you start falling behind on loan payments or feel a danger of foreclosure, you can get the help of FHA, which offers several options to keep your home safe. Therefore, whatever condition you have, FHA has one or more special loss mitigation programs to help you improve your situation.

Finally, to conclude, FHA loans offer more than simply offering you mortgage insurance and solutions to prevent foreclosure of your home. It also offers you a loan to maintain your home properly through its other loan program. This loan option helps you buy your house and keep it too.

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What is closing?

There are broadly, three steps in the overall borrowing process: First, you meet the FHA loan requirements, second, your application is processed and third the loan is offered to you. Closing is actually the third step when you, your lender and agent sit together to complete the remaining formalities and you get the loan. However, the detailed process of closing has been discussed below.

After you submit your application along with all the required documents, the lender verifies the information you provided in order to check whether you meet the FHA loan requirements or not. Subsequently, the lender arranges to carry out the appraisal of the house. After this process is over, the lender may call you to let you know the outcome of your application and if the loan is approved, a closing date is fixed. As the name itself defines, on closing day, your loan process is ideally closed and you are ready to move into your new home. However, there are certain activities that take place on the closing day in order to complete and close the process, as mentioned below.

Activities on the closing day:

Borrower:

• Produces homeowner’s insurance policy/proof of premium paid.
• Signs mortgage
• Also signs a mortgage note, promising to repay the loan.
• Pays the lender’s agent all closing costs.

Closing Agent:

• Lists the amount of money borrower owes to the seller and vice versa
• Provides borrower with a settlement statement of all items paid by the borrower.

Seller:

• Provides proof of inspection, warranties etc.
• Gives the borrower the title to the house in the form of a signed deed.

After completion of all the above activities, the deed and mortgage are recorded in the state Registry of Deeds, and the borrower becomes the legal homeowner.

What borrower gets on closing day?

• Settlement Statement, HUD-1 Form
• Truth-in-Lending Statement
• Mortgage Note
• Mortgage or Deed of Trust
• Binding Sales Contract
• Keys to your new home

The Closing Cost

Closing costs usually consists of the following:

• Loan origination cost
• Recording charges
• Cost of appraisal
• Title insurance cost
• Premium of mortgage insurance
• Discount point
• First payment to escrow account
• Attorney’s fee
• Property tax
• Payment to escrow account
• Any other documentation charges

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Income criteria to meet FHA loan requirements:

In order to meet FHA loan requirements, neither FHA nor its approved lenders prescribe any minimum or maximum limit of income. However, since income is the base on which any loan is calculated, it plays the prominent role in the overall mortgage process. Therefore, you must have a permanent and regular source of income, atleast for last three years. You should also be able to prove that you have been consistently paying your bills on time. The basic criteria to meet FHA loan requirements are as follows:

The income criteria:

• You should have a reliable and permanent source of income, preferably through employment, which can show your ability to may the monthly mortgage and other costs.
• You should have a good record of timely paying your bills.
• You should also show some savings to offer as downpayment
• Do I have few outstanding long-term debts, like car payments?

Source of income:

In addition to your salary, the following can also be considered as a source of income, as long as these show steadiness:

• Part-time pay, bonus pay and overtime
• Seasonal pay,
• Child support,
• Unemployment compensation,
• Social Security income,
• Rent paid by family
• Retirement pension payments,
• Alimony,
• VA benefits and
• Military pay

Your income decides the loan amount:

Lenders calculate the loan amount, to be offered to you, on the basis of your gross income with the help of a formula called debt-to-income ratio, which is the ratio of your income and expense (housing & non housing). Long term debts such as educational loan, car loan, child support, alimony etc. come under non-housing expenses. As per FHA, your monthly repayments for mortgages should not cross 29 per cent of your total gross income. The other condition is that your mortgage payments and your non-housing expenses together should not be more than 42 per cent of the income. However, while deciding the loan amount, lenders also consider few other facts such as down payment, credit record, closing costs etc.

Therefore, in the case of an FHA loan, the source and amount of income are not as important as the steadiness of your income. However, the level of your income is definitely an important issue since the more income you have, the better chance you have to borrow a loan of higher amount. But if you have low income, it does not mean that you would not get a loan. Therefore, in order to meet FHA loan requirements, you must have a permanent and regular source of income.

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Falling behind FHA loan payments:

During the loan application processing, when you find that you meet each and every FHA loan requirement and your application has been approved for a loan, you feel great! But if you do not manage this loan and its monthly mortgage properly, you can very easily find yourself surrounded by debt problems. One such problem is falling behind on monthly payments, which is taken as a sign of impending danger.

What are the actions required, if you start falling behind payments?

If you start falling behind on your FHA loan payments, it is a clear cut indication of that your mortgage may lean towards default which may lead to foreclosure. In this situation, you should try to contact one of the following in order to seek their guidance so that you can save your home:

1. I. Your lender or
2. II. HUD approved counseling agency and
3. III. Take action as suggested

For FHA loans:

As with every loan, if you start falling behind on your payments, you may lose your property. Same is the case with FHA loans. If you do not repay in time, your dream house may be in danger and can be overtaken by FHA so that they can repay the debt to the concerned lender.

Contact your lender:

However, there are several options that can help you save your house and so you must take instant actions instead of waiting for your lender or FHA to get in touch with you. First step is to contact your lender immediately to avoid any unwilling situation. This is important since your lender can suggest you various options in order to avoid foreclosure. One of the options that you can discuss with your lender is H4H which is the short form of “HOPE for Homeowners (H4H)” program. It was created by congress to help those at risk of loosing their home and to provide them with foreclosure refinance. The program provides a fixed rate 30 year mortgage insured by Federal Housing Administration (FHA) if you and your lender agree to certain conditions.

Contact any HUD approved counseling agency:

In case your lender is reluctant to offer you any advice, you may contact any HUD approved counseling agency, who have trained counselors to deal with such situations. Infact, the counselors are counseling agencies handle the problem that you are facing on daily basis and therefore they are the experts on offering the right advice.

In addition to the above, you may take the following actions:

• Continue to live in your house which will make you eligible for assistance.
• You may take help of the several special loss mitigation programs offered by HUD, such as:
  • Special Forbearance: This is a special repayment plan, in which your lender may offer you a revised payment schedule that may include reduction in the amount of monthly payments or temporary suspension of payments. You can qualify for this if you have involuntary reduction in your income or increase in living cost.
  • Mortgage Modification: This plan also helps you by reducing the amount of the monthly payment by refinancing debt, extending the term of mortgage loan etc. If you have just come out from any serious financial problem which resulted in reduction in your net monthly income, then you can qualify for this special loss mitigation program.
  • Partial Claim: you lender may assist you in borrowing an interest free loan from HUD in order to bring your mortgage current.
  • Pre-foreclosure Sale: This option gives you an opportunity to sell your property and clear your mortgage loans in order to avoid foreclosure.
  • Deed-in lieu of Foreclosure: Through this option, you can give back your property to your lender in order to save your time, cost and efforts, otherwise you would have required to spend on the foreclosure process.
  • You can also contact the FHA Loss Mitigation Center for help if your lender is un-cooperative or your loan officer is avoiding to offer you the most suitable loss mitigation options.

Summary

It is important to meet FHA loan requirements in order to borrow loans. But maintaining its payments is equally important. Otherwise falling behind your payments can have serious consequences including foreclosure of your loan and so, you may loose your home. To avoid foreclosure you should act immediately and contact your loan provider to reach a solution. There are a lot of available options such as reinstatement, loan modification etc. which you can choose according to your need.

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FHA loans have been catering to the needs of all types of buyers with the mission, “anyone willing to own a home, should get a home”. Therefore there are different types of mortgages in order to suit the needs of each individual borrower. However, these different mortgages have different features and can have significant influence on your borrowing and repayment process. Therefore, after checking your eligibility in terms of FHA loan requirements and before starting an application for loans, you must check and evaluate the different types of mortgages offered by different lenders/brokers and chose a particular type of mortgage only if it suits your needs. Overall, there are three types of mortgages, as follows:

1. Fixed rate mortgage
2. Adjustable rate mortgage
3. Other mortgage programs

Fixed Rate Mortgage (Section 203(b)):

You may find several loan options that you can avail through FHA loan. The most commonly sought after FHA loan is the fixed rate mortgage. Fixed rate loans are usually available for 15, 20 or 30 years. The interest rates and monthly payments (covering principal and interest both) in case of fixed rate loans remain the same for the whole mortgage.

The advantage for the lender is that FHA insures these mortgage loans for the complete term of the loan. The advantage, for borrower, with this loan is that amount payable remains same and therefore you always know the amount that you have to pay and hence can always plan ahead. However, the negative side is that in case of any fall in interest rate, you will not be able to get the benefits. Its different features are:

Adjustable rate mortgage (Section 251):

Like Fixed rate mortgage, Adjustable rate mortgage is also self-defining. In ARM, the rate of interest and therefore the monthly installment payment varies from time to time. However, usually, when the loan starts, the rate of interest remains lower than that of fixed rate which later on may change either way-up or down, depending upon the changes in the market. However, the change in interest rate takes place approximately twice a year. But this change can’t be more than 1 percentage point, either increase or decrease. Similarly, rate of interest can’t increase or decrease by more than 5 percentage point compared to the initial interest rate. Its different features are:

Specific products offered by FHA:

Overall, FHA insures the following loans:

1. 203(b) LOAN
2. 203(k) LOAN
3. ENERGY EFFICIENT MORTGAGE (EEM)
4. TITLE I LOAN
5. Others: Loans for the purchase/rehabilitation of

• Manufactured housing,
• Condominiums and
• Cooperatives.

Purpose of FHA mortgages:

These mortgages can be used for buying a new or existing one-to-four family housing or for refinancing existing loans.

FHA loan limits:

Limits for FHA loan vary from place to place across the country, on the basis of prevailing average costs in different areas. The current limits are up to $ 115, 200 in low cost area to upto $ 208,800 in high cost areas: Similarly, the maximum limit of loans for multi unit homes is higher than that of single units. However, FHA loan limits changes periodically.

Downpayment:

Downpayment is the main factor that makes FHA loan requirements easy to meet, which in turn makes it popular, especially among first time home buyers. The downpayment requirement is as low as 3% i.e. upto 97% of the total cost can be financed. However, lenders consider the financing rule up to 97% along with other factors such as debt-to-income ratio. Therefore it is not always necessary that you would get 97 percent finance from the lender.

Closing Cost:

The different closing cost such as property taxes, attorneys and escrow fee, title insurance etc., come to approx 2-3 % of the total cost of home. However, FHA allows borrowers to get finance for closing cost also, which ultimately reduces the upfront payment. Similarly, there are other options to further reduce the upfront payment.

Eligibility & Mortgage Application:

Anyone who meets the FHA loan requirements can borrow loans to use the mortgaged property as residence is eligible to apply for FHA loan. There is no discrimination on the basis of income or education level, location, etc. Applications for FHA loan can be made on a prescribed application form to any FHA approved lender, who in turn processes the application and documents, verifies information given and gets the appraisal of the property done, before making the final result.

Other mortgage programs:

In addition to the above types, there are several government sponsored mortgage programs such Department of Veteran Administration’s (VA) mortgage programs and Department of Agriculture’s mortgage programs. In addition, there are several mortgage programs sponsored by different state/local governments and local organizations. These programs cater to the needs of citizen of the respective state.

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Borrowing is always associated with payment i.e. for example, if you are in need of money, you then decide to borrow or receive a loan. You need to prepare yourself to meet FHA loan requirements. First, you file the loan application, your application is approved and you get the money, then you start paying back the money every month, at a fixed amount that includes principal as well as a certain percent of the loan amount as interest. Lending and borrowing is a two-way process. Therefore there can’t be one in the absence of another. This is a core concept in any form of lending.

Ok, so you’re meeting all the FHA loan requirements. That’s great. But it has no meaning unless you get the loan amount that you want or need to borrow. Similarly, in terms of lenders, you can’t meet all FHA loan requirements unless you prove that you have a permanent and regular source of income. Infact, as far lenders are concerned, they are more interested in steadiness of your income rather than the source of income. Such views force you to think the reason behind such important roles of loan amount and income. The important roles of these two factors are discussed below:

Loan Amount and Income: Why are they so important?

Let us suppose you want to buy a new home for which you need a loan. Now, to decide the maximum amount of loan that lenders can offer you, lenders take help of your debt-to-income ratio, which is the ratio of your income and your housing and non-housing expenses. Your non-housing expenses include all long-term debts including expenses such as auto loans, education loan, child support etc. Now as per FHA rules, your monthly payments for loans should not exceed 29% of your gross income whereas mortgage payment and non-housing expenses together should not exceed 41 per cent of your total income.

To find out the maximum amount, lenders also consider other factors such as amount of downpayment that you intend to make, closing cost of loan, your credit record etc. Therefore, the higher the income and lower the expense, the higher the loan amount that you can get.  However, if you do not have any fixed source of income, it is highly unlikely that any lender would offer you any loan. This is because your income shows your repayment capacity, which may not be available if you do not have any permanent source of income. As far as this topic is concerned, the whole lending process is based on your income. Therefore, the above factors make loan amount and income so important.

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If you meet all the FHA loan requirements, even then there are few steps that you should follow in order to get a loan that suits your specific needs. These steps are

• 1. Find right type of loan
  2. Compare loans terms between lenders
  3. Make application
  4. Close

I.         Finding the right loan.

The objective of borrowing a mortgage loan varies from person to person and so the ideal loan must meet the individual needs of the borrower. Therefore, in order to find the most suited loan, you can ask yourself few questions that would help you choose the most suitable loan for your scenario. Few of these questions:

• Is your income expected to increase over the next few years?
• Are you going to live in this home for long period?
• Do you feel comfortable with changing the amount of your mortgage payment?
• When do you plan to be free from mortgage debt?

Your real estate broker or lender can easily help you choose the most suitable loan, based on your replies to above question. However, you may want to know that how your replies to above question can decide the type of loan that you want. To understand the concept, let us take the first question. If you reply that your income is expected to increase over the next few years, then adjustable rate mortgage (ARM) can be more suitable for you then any other type of loan. This is because, in ARM, the amount in initial years remain small, which increase in time.

II. Compare loan terms offered by different lenders:

There are different factors based on which terms of loans offered by different lenders should be compared. These factors are the type of mortgage, required amount of downpayment, rate of interest and points, loan processing time, closing costs, whether prepayment is allowed or not etc. In addition, you can also find out some background information about the lender, its market profile, satisfaction level of lender’s previous clients etc. Based on these factors you can very easily chose a term which is suitable to your individual needs. Background information will help you in choosing the right lender.

However, while seeking information from lenders, provide all the lenders the same information about yourself. Also, try to get information from all lenders on the same day. Moreover, you can get this information simply by meeting all FHA loan requirements. You have to put efforts to get this information from the lenders, as suggested above

III.      Making application

At this stage you have to prove through documents that you meet the FHA loan requirements. Therefore, after choosing the type of loan, loan terms and lender, you should make the application for the loan. While filling out the form, you can also get help from the lender’s customer service executives. Also, before filling out the form, collect all information and documents needed, which will save lot of your time. After filling the application form, attach all documents as per requirements and submit the same. Now, remember, your application processing may get delayed even if a single document is missing. Therefore carefully collect and attach all required documents. Usually information/documents on the following board categories are required:

• Employment related
• Credit
• Savings
• Personal Information
• Description of the property

After you submit your application, the lender will get the appraisal of the property done.

IV.       Closing

At times, lenders ask for more information after you submit your application. It is advised that you provide all required information as fast as possible. After evaluation of your application and verification of information provided by you, the lender may call you to inform you the outcome of your application. If the loan is approved, the lender will decide a closing date. The whole process may take anywhere between 1 to 6 weeks.

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FHA Loan Requirements for Bad Credit Holders:

There are several reasons why people prefer FHA loans over traditional loans. Infact there are several protections and benefits which are offered only through FHA loans. One such benefit is easy qualifying conditions which mean that the main objective of an FHA loan is to help potential buyers and homeowners in achieving their dream home and therefore the FHA approved lenders help borrowers by relaxing various conditions. Moreover, partly due to the objective of FHA loans and partly due to enhanced security in lending due to mortgage insurance by FHA, lenders relax the criteria on case to case basis so that potential borrowers can meet all FHA loan requirements easily. One of the most important FHA loan requirements that is most often relaxed (on a case to case basis) is the credit requirement. So, even if you have not-so-perfect credit or in other words, bad credit, lenders analyze your case and accordingly offer you loan.

Through relaxed criteria and by offering a loan, FHA helps you not only in meeting FHA loan requirements but also in improving your credit. However, in order to get relaxation, you need to meet the following conditions:

• Two years should have been passed since the applicant has been discharged from bankruptcy, if any.
• Foreclosure, if any, should have been atleast three years old, Or, a deed-in-lieu has been resolved.
• Payments must have been made against all judgments
• All due tax liens have been met or repayment plan has been established with IRS/Revenue department of the state

FHA Loan Requirements: Borrowing FHA loan without credit history

You have another option if you have a bad credit record. Lenders can accept your eligibility for FHA loan if you intend to pay your debts in cash, which is, however decided on a case to case basis.

Other options for bad credit holders:

Bad credit may also make you a suitable candidate for federal mortgage programs. Therefore, contact any HUD sponsored counseling agencies that may offer you complete information and guidance. Also, different states have their own local home buying programs that might be useful for you. Therefore, you can also try with these federal and state run programs in order to fulfill your dreams.

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How to enhance loan amount if you meet FHA loan requirements?

Meeting FHA loan requirements is one aspect and deciding the amount of loan is another aspect. This is because there are condition areas that you need to meet in order to fulfill all FHA loan requirements. However, the amount of the loan is decided more or less on the basis of your income and savings or any other factors related to these two such as your expenses, any closed loans, any existing long-term loan(s), credit record, amount of downpayment etc.

Now, in case of expenses, there are two types-Housing and non-housing expenses. Non-housing expenses include long-term debts such as auto loan, education loan etc. To determine between income and expenses, lenders use debt-to-income ratio in order to decide the loan amount.

In case of the debt-to-income ratio, monthly mortgage payments should not be more than 29 per cent of gross income while mortgage payments along with non-housing expenses should not be more than 41 per cent of the gross income.

Different steps to increase the loan amount:
You can increase the loan amount in certain cases e.g. if you pay more down payment. It has been observed that lenders rate your interest in the loan with the increase in the amount of down payment, which means if for any purpose, you offered to pay $10,000 and the other person offered $20,000, lenders would prefer to lend to the other person. This is because, by paying higher amount, the other person shows his commitment. Moreover, lenders consider that the higher the amount of down payment, the better the chance that that borrower would pay the complete debt. The different methods of increasing your loan amount in case of FHA loans are as follows:

• Higher down payment
• Ability to pay more towards housing expenses
• Sufficient liquid reserve that can show that you would not have any problem in future in paying your monthly payments.
• Sufficient asset to show that you can clear your debts anytime, if need be.
• Good credit record.
• funds provided by an organization
• Reduction in your expenses.

Therefore, you might be meeting all FHA loan requirements for a loan of any given amount. But in order to enhance the given loan amount you have to meet the above given conditions. However, you can observe that if you meet all the requirements for an FHA loan then meeting requirements to enhance the loan amount would not be tough.

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