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FHA Mortgages

FHA mortgages are some of the easiest to get. That's because the Federal Housing Administration insures every FHA loan. The lender who writes the loan is more insulated against risk. So are you--the FHA must approve lenders, and they must adhere to FHA's guidelines.

Thus, the requirements are the same no matter which lender issues the loan.

Down Payments

Your down payment will depend entirely on your FICO score. You can get an FHA loan with a score as low as 500, but you'll need a larger down payment: 10% of the loan amount. If your credit score is above 580 you only have to come up with 3.5% down.

By contrast, a conventional home loan requires a down payment of at least 20%.

Conventional loans also place restrictions on your down payment. In a conventional loan, that amount must be drawn from your own assets, such as a savings account, or a CD. An FHA loan is more forgiving. You can use gift funds and grants in addition to your own assets.

Debt-to-Income Ratio

Keep in mind your credit score isn't the only determinant of your ability to get approval for a mortgage. It's just the one that makes the news the most.

You also need to watch your debt-to-income ratio. For an FHA loan, this must be lower than 43%. If you make $50,000 a year, then the total of all your debt payments, including car loans, credit card payments, and other accounts can't exceed $1791.66 per month.

This does include student loans, though there are loopholes. The FHA won't look at your total amount of student debt. It will look at your monthly payment, or 1% of the balance, whatever is lower. This is a boon for people who are on the income sensitive repayment plan.

There are other loopholes as well. For example, the DTI is a little more forgiving if you're purchasing an energy-efficient home. The same is true if you're a primary wage earner who is relocating, or have a sizable cash reserve. It may even be possible to get around the requirement by raising your monthly payment. I'll help you find the work-around if it's at all possible.

PMI

You'll need to purchase Private Mortgage Insurance, or PMI. The only way around this is to put a 20% down payment down, just as for a conventional loan.

PMI must be paid on an annual basis, so make sure you set aside money for your premiums each month. You'll have to pay the first year's premium when you close on the home.

Some people eventually refinance their FHA mortgage so they can stop making PMI payments.

Other Requirements

To get an FHA loan your home must be your primary residence, not a second home or rental property. The home will need to be in livable, safe condition. You can buy a duplex, triplex, or fourplex, however, and you can live in one of the units while renting out the others.

It takes a formal home appraisal and inspection to meet these requirements.

You should also have a steady source of income, and have paid on time on every account for at least one calendar year before applying for the mortgage.

Is an FHA mortgage right for you?

Give me a call or stop by our office on Broadway in Merrillville to find out more. I'll be happy to review your circumstances and to help you determine whether an FHA mortgage is your best choice.

And if it isn't, I'll help you find the mortgage that is!