The following post is a guest post from Houston, Texas area real estate developer and entrepreneur Tracy Suttles. Tracy can be best contacted for questions, comments and concerns on Twitter at @tracydsuttles.
FHA mortgages are provided by the Department of Housing and Urban Development (HUD) to help low income families and first time house buyers get a foot on the property ladder. They cater for those who have a bad credit history and/or are able to only offer a low mortgage down payment. The maximum amount that can be borrowed is 115% of the median house price in the local area. This means that home buying help is available for those who live in the more expensive parts of America, such as central New York. It is important to make an assessment of the pros and cons of FHA loan mortgages before proceeding.
Advantages of an FHA Mortgage
- Low mortgage down payment. A first time house buyer will normally need to find a house deposit of 20%. However, an FHA loan mortgage means that only 3.5% is required as an up-front payment.
- Bad credit history. Those with missed and late payments may still be able to get approval. Individuals who have filed chapter 7 bankruptcy may be able to get their loan approved once 2 years have elapsed since they were discharged. The figure rises to 3 years following foreclosure.
- Debt to income ratio. Whilst conventional home mortgages require the ratio to be below 36%, it can be up to 43% with an FHA mortgage. Affordability can also be established on the basis of mortgage payments expressed as a percentage of net monthly income – up to 31%.
- Mortgage types. There are a number of different loans available, including fixed rate mortgages. There are also a number of different options, such as the growing equity mortgage and the graduated mortgage. There are fewer limitations than with other federal programs.
- No prepayment penalty. Unlike other mortgages, there is no early redemption penalty.
Disadvantages of an FHA Mortgage
- 1.75% Mortgage Insurance Premium (MIP). As well as finding a 3.5% mortgage down payment, it is also necessary to find a further 1.75% of the mortgage value to cover the risk of default.
- Property type restrictions. It is only available for an existing single family home, one to four family homes, condominium units or a manufactured home on a permanent foundation.
- FHA mortgage processing. It typically takes longer to process than conventional loans due to the additional government regulation and paperwork.
- Selling a home. The higher cost of helping a first time house buyer is likely to mean that the seller is less likely to reduce the sale price.
- Loan origination fee. There is typically a loan origination fee of 1% on FHA loans.
FHA Loan Mortgages – Home Buying Help for First Time House Buyers and Low Income Families
An FHA mortgage is an excellent way for first time house buyers or those with a bad credit history to get a foot on the property ladder with a minimal mortgage down payment. However, individuals looking at more expensive property or have really bad credit history are unlikely to be eligible. It is sensible to consult a mortgage advisor to identify all suitable options prior to making a decision.