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FHA Loans Regain Their Popularity

Driven nearly to the point of extinction by the free-for-all mortgage programs of the recent economic boom, the FHA loan is stepping back into the spotlight. Here's why:

Low down payment requirements

Those who qualify can obtain an FHA loan with a down payment requirement as low as 3.5%. But that's not all. The money used for a down payment can be given to you as a gift from a relative, employer or other approved source. If you don't have a relative or employer who can help, there are other places you can turn for down payment assistance including government agencies and non-profit organizations.

FHA loans are federally-insured

And that means less risk to lenders. Because their risks are lower, mortgage industry experts have seen some lenders relax their lending requirements in an effort to help more borrowers qualify.

More first-time buyer power

FHA loans allow what's called a Non-Owner Occupant co-borrower, and that's a huge benefit for first-time buyers who need co-signers. This change lets parents cosign to help their children qualify for a mortgage. Then later on when the buyer's financial situation improves the buyer simply assumes the loan meaning the buyer can avoid the refinancing process and the possibility of higher rates.

Here's what you should know about FHA loans:

• How much you're allowed to borrow under FHA guidelines varies depending on the location of the property you intend to purchase and also on the type of home you intend to purchase. To learn more about loan limits in a specific area, visit the HUD website.
• Not all lenders and brokers are FHA-approved. When pursuing an FHA loan, the best advice is to work with a lender or broker that is approved by the FHA. If working with a broker, consider choosing one that is certified by the National Association of Mortgage Brokers (NAMB).
• FDA loan approval requires you to carefully detail your income including a requirement to provide documentation proving a source of income that's both verifiable and stable.
• The qualifying debt-to-income ratio for FHA loans starts at rates ranging from 31 percent to 43 percent. The debt-to-income ratio to qualify for a Freddie Mac or Fannie Mae loan starts at 28 percent.

What does all this mean to you?

If you're ready to buy a home and can't afford a large down payment, but you have a credit score of at least 580 and a moderate income, an FHA loan might be right for you. They're backed by the government, more secure, less restrictive, and could help you buy more home for your money.

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