There are several different loan types that a person can look into.  The first type of loan is a traditional Conventional Loan.  Conventional loans are fixed rate mortgages that are not backed or insured by the federal government.  These types of loans can be difficult to obtain because of their strict requirements when it comes to down payment, your credit score, your income, and costs like private mortgage insurance.

Conventional loans are either conforming loans or non conforming loans.  A conforming loan complies with guidelines that are set by Freddie Mac or Fannie Mae.  Both of these companies are owned by stockholders and they create guidelines for mortgage lending.  One of these guidelines is the loan limit of $417,000 for single family homes (like I talked about in my last post).  Non conforming loans are usually provided by portfolio lenders and have a set of guidelines that are regulated by a particular lending institution.

FHA Loans (My personal favorite, if you can’t tell) are backed by the federal government.  An FHA home loan offers lower down payment requirements and are much easier to obtain than traditional conventional loans.  They are perfect for first time home buyers not only because of the low down payment option, but flexible credit requirements and they look at your whole financial situation to determine if you qualify.

VA Loans are unique because they are only available to veterans and The U.S. Department of Veterans Affairs guarantees all VA loans.  The VA is not the one who lends the money to borrowers, instead, they guarantee mortgages made by approved lenders.  These types of loans make it easy for veterans to obtain home loans with no down payment and they are so much easier to obtain than any other type of loan.  Before you apply for your mortgage, you need to request eligibility from the VA.  If you are accepted they will send you a qualifying certificate.

If you are  first time home buyer, I hope that this has been enlightening and very informational.  If you are ready to pursue financing for your mortgage needs, please contact us right now and we can get started!

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• Low minimum down payment (about 3% of the value of the home)
• Very reasonable credit requirements
• Very flexible income requirements

Compared to conventional loans, FHA lenders tend to look at the entire picture instead of a few of the most important things that would generally qualify or in some cases reject someone from obtaining a mortgage loan.

Just to be perfectly clear, an FHA home loan is not perfect for everyone and in some cases, you cannot qualify for FHA financing.  I wanted to take some time today to help you understand the basic requirements for this type of loan.

Background

The money given to you for your FHA loan is not given by the FHA.  Instead, borrowers will receive their loan funds from FHA Approved Lenders and the FHA guarantees the loan amount.  Because of this, many different lenders might be offering you the exact same mortgage since the guidelines don’t change from lender to lender.  Let’s have a look at what makes a borrower eligible for this type of financing.

Dwellings Eligible For FHA Financing

To begin, the property that you are looking to obtain a mortgage for must by your primary residence and must be owner occupied.  This type of loan is not an option for anyone looking at investment or rental properties.

• Detached Houses
• Semi Detached Houses
• Townhomes
• Row Houses
• Condos (within FHA approved condo projects)

Are all eligible for FHA financing.

Maximum Mortgage Amount

The maximum amount of financing that a borrower can receive for an FHA home loan, assuming that the borrower meets the income requirements is based on two things, one, the maximum loan limit for the geographical area that the home is located in, and two, the maximum loan to value (LTV) ratio.  As of the middle of 2007, the maximum loan limits for most states is $417,000.

Credit Score

Now this is where most people take a deep sigh of relief.  The FHA doesn’t have a minimum credit score that you must meet to be eligible for financing.  That being said, borrowers with poor credit scores can and will be disqualified for activities that caused the poor credit score, such as not paying your bills on time.

Having no credit history is not a problem either.  Instead, the lender will look at other payment histories such as utilities, cell phone bills, rent payments, etc.  In addition, if you have foreclosed, done a short sale, or filed for bankruptcy, it will not disqualify the borrower from obtaining a loan as long as enough time has passed and the borrower has established a documented track record of managing their finances since the incident.  Here are the time frames for each of the violations above.

• 3 years for a foreclosure or short sale
• 2 years for a bankruptcy

Employment and Income

Only stable and documentable income can be considered for an FHA home loan.  So if you were planning on doing a stated income loan, you need to look elsewhere for financing.  The general rule of thumb is that lenders like to see a steady track record of employment, generally two years in the same field of work with no more than a one month gap of unemployment in between jobs.  The job that you have when applying for the loan must be expected to continue for at least three years after you obtain FHA financing.

Part time employment cannot be counted toward those two years required for this type of loan, unless that employment has continued for at the very least, two years. Those with full time, contract positions that will be ending soon will have a hard time getting a loan as well.

However, if a borrower has changed jobs frequently in order to move up in their field of work and to increase their income are looked upon very positively.  There are also special considerations for individuals who work seasonal jobs and who have taken time off to raise a family or to pursue an education.

For those of you who are self employed, you will have a harder time getting an FHA mortgage.  I’m not saying it is impossible, but it requires some documentation.  First off, you will need at least a two year history of self employment, documented by tax returns, balance sheet, and profit and loss statements.  For those of you who are self employed and haven’t gotten two years under their belts, they can qualify as long as they have been self employed for at least a year and have been working in the same field prior to self employment.

Debt To Income Ratios

Currently, the FHA doesn’t set a limit to the amount of debt you can carry in relation to your gross monthly income, however, it is recommended that you don’t exceed 45%.  If you do, you can still get an FHA home loan, but it takes special consideration and some hefty cash reserves.  The 45% can include…

• Mortgage Payment
• Interest
• Taxes
• Insurance
• Car Payments
• Student Loans
• Credit Card Payments

Down Payment

One thing that makes FHA loans very desirable by first time home buyers is their very low minimum downpayment requirement, it is currently 3% of the purchase price.  However, this percentage is expected to increase at the beginning of 2009.  So, if you need an FHA home loan, you better get it before the end of this year.

Mortgage Insurance

FHA loans definitely require mortgage insurance because they require such a small down payment.  Up-front mortgage insurance is due at the time of signing and is equal to 1.5% of the value of the home.  This is usually rolled into the mortgage so the borrower doesn’t have to come up with any extra cash to close.  The monthly mortgage payment will also a montly mortgage insurance premium which is 0.55% of the loan amount on an annual basis.  This mortgage insurance premium is usually lower than mortgage insurance on a conventional loan.

You can clearly see that this type of mortgage is a very flexible solution for not only first time home buyers, but anyone looking to obtain a mortgage loan.  I highly suggest that if you are looking for a mortgage, to see if you qualify for an FHA home loan.  On one last note, not only are these great loans, but, they are easy to refinance with an FHA Streamline Refinance.  FHA Streamlines are quick, easy, and a hastle free way to lower your interest rate and lower your monthly payments.  This is truly a great program!!

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In the past, some people have gotten around this rule by obtaining two mortgages, one for 80% of the home and the other for how ever much they needed, I saw many get 100% financing so the other loan would be 20%.  Today, in with our economy the way it is, it is almost impossible to get 100% financing for any loan that you are considering.

If you are one of the lucky individuals who get to have private mortgage insurance (if you can’t tell, I’m being sarcastic), here is a very slick tool that I like to use to find out how much PMI you are going to pay each month.  To access this tool, click here.  I like this tool because it is very accurate, fast, and easy to use.  Much better than figuring it out by hand.

Hope you enjoy this tool and keep checking back for more mortgage news in the state of Utah and all around the nation.

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Each of these things are definitely within your control and you can do some things to help make you a more attractive mortgage candidate.

Repair Your Credit & Increase Your Credit Score
Your credit score says everything about you and your ability to repay a loan issued to you and do it on time very single month. People with lower credit scores, can definitely expect a much higher interest rate tacked to their home loans, if your score is below 650 you will have a VERY difficult time getting a mortgage loan, if at all! However, those with scores above 800 will have the lowest interest rates and have no problem getting a loan.

Get A Higher Paying Job Within The Same Industry
If you are having a hard time getting qualified for a loan because you don’t make enough money to pay for the home that you are interested in, you should should start hunting for new job that pays more. One thing you need to take note of, lenders like to see a long, stead history of employment, so if you want to be considered for the loan after the job change, it needs to be in the same line of work. If you need a little more nudging and encouragement about switching jobs, you can click here.

Save Your Money Like A Mad Man
It is no secret that the larger your down payment is, the smaller the loan amount will be. Not only that, but the lenders that are considering you will see you as a less risky borrower.

Don’t Ever Pay More For A Home Than The Appraised Value
This is pretty much a no brainer, since the bank or lender will not want to lend you any more money than the actual property is worth.

Reduce The Amount Of Debt That You Carry
Other than your credit score, debt is one of the biggest reasons why people cannot qualify for a home loan. There is no magic number as to how much debt you can carry in addition to your mortgage, but lenders will be much more likely to lend you more money, if you have more debt.

I hope you can take some of these things to heart if you are considering purchasing a home in the next few months. You need to play the game and play it well if you want win!

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