Federal Housing Administration Mortgages

You want to buy a home, but your debt-to-income ratio is causing a problem for you. Plus, you don't have a whole lot of money to use for down payment purposes. A Federal Housing Administration (FHA) mortgage may be your pathway to owning a home.

The FHA is a federal government agency that guarantees mortgages given to eligible borrowers. Note that the FHA only guarantees the loans; it doesn't actually lend out the money. The mortgages come from the same lenders that anyone seeking a mortgage would typically go to, but these lenders also are approved by the FHA. The mortgages include most of the types of mortgages offered by all lenders. And similar to all mortgages, most FHA mortgages will be 15- or 30-year conventional fixed rate mortgages, as well as various adjustable rate mortgages.

If you're thinking that it's really great of the government to guarantee your mortgage, we agree. However, you'll pay for that guarantee. The FHA charges you an insurance premium to guarantee your mortgage. The amount the agency charges is a percentage of the amount of your loan, and that percentage varies depending on the type of home you purchase.

Advantages of FHA mortgages. Despite the insurance premium, FHA mortgages have a couple of distinct advantages and some great built-in features. The best advantage is that your down payment amount is typically around 5 percent of the purchase price of your home. Since larger down payment percentages are the hurdle that keeps many people out of the home ownership game, a lower down payment requirement removes that obstacle. Another helpful feature is that the debt-to-income ratio percentage tests as applied by FHA-approved lenders aren't as strenuous as those used for conventional mortgages. FHA-approved lenders are also allowed to consider other extenuating circumstances when deciding whether you qualify for a mortgage.

Therefore, if you think, or know for sure if you've already tried to pre-qualify for a mortgage, that you won't make the cut for a traditional mortgage, we encourage you to see if you qualify for a FHA loan. The factors that can be considered by FHA lenders are not specified so you won't know if you qualify unless you try.

Tip We don't mean to imply that if you apply for a mortgage other than a government-guaranteed one that lenders will never look at anything other than the numbers and formulas concerning debts and income, determining whether you qualify for a loan and in what amount. However, we would like to stress that the leeway that these lenders have to take into account other factors specific to your individual situation is slim. On the other hand, the purpose of FHA mortgages is to enable prospective buyers whose numbers don't quite plug into the traditional formulas to obtain a mortgage and purchase a home.

Additional FHA mortgage advantages. As we mentioned above, there are some other great features that FHA mortgages have. Remember that insurance premium we mentioned earlier? Some lenders will allow you to borrow enough to cover the purchase of your home as well as the FHA insurance premium. You can also include your closing costs in the amount that you borrow. That means that you don't have to come up with this money yourself. This can be a big help if you're straining your finances as it is.

Another great feature that FHA mortgages have is that you can prepay your mortgage without a penalty. This is a big plus if you want to pay off your mortgage ahead of schedule and save yourself some interest. You won't get penalized as you might be if you have a mortgage that isn't insured by the government and that mortgage has a prepayment penalty clause. You may even be able to get a partial refund for the insurance premium you paid for your FHA loan if you prepay your mortgage.

Finally, if you decide to sell your home before the mortgage is paid off, you should be happy to learn that your FHA mortgage is assumable. This is not typically the case with mortgages that aren't guaranteed by the government. What does it mean if a mortgage is assumable? Basically, it means that the new buyer of your home steps into your shoes and takes over the existing mortgage subject to the same terms and conditions. While the buyer who purchases your home will usually have to be approved by the FHA, the fact that your mortgage is assumable makes it that much easier to sell your home.

We'd like to point out that there is a FHA mortgage limitation that borrowers should be aware of. This limitation is on the borrowed amount that the FHA will insure. The limit is determined by a percentage of the median home price in your area of the country. What this means is that if you haven't had any luck getting other financing to purchase an expensive home in your area, chances are that an FHA mortgage is not going to help you realize that goal either.

Warning Don't assume that all FHA-approved lenders will offer you a mortgage with the same interest rate or even a low interest rate. The lenders are the ones that determine the rates, not the FHA. Therefore, it is important to apply for a mortgage with more than one FHA lender just as you would with other lenders in order to make sure you get the best rate.

All in all, with their biggest downside being the costly insurance premium you'll have to pay, FHA-insured mortgages can be a great way to realize your dream of home ownership. For more information, you can go to the Federal Housing Administration's website.

Farm Service Agency (FSA). As a final note with regard to guaranteed government mortgages, if you plan to make your home in a rural area and meet the income guidelines, you may be eligible for loan assistance from the Farm Service Agency (FSA). For more information, check the FSA website.

© 2024 Wolters Kluwer. All Rights Reserved.