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FHA Loans for a First-Time Home Buyer


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TERMINOLOGY

FHA (Federal Housing Administration) loans are popular with first-time home buyers. After the subprime meltdown, it has been more difficult for first-time home buyers to qualify for a mortgage. FHA loans are still easier to get and have some advantages over conventional mortgages. As long as you don't already have a mortgage with the FHA and you meet the following requirements, you can expect a loan approval.

Credit

The FHA is lenient on credit issues and is understanding of personal situations. Some blemishes will be excused with an explanation. If you had a previous bankruptcy, you can get an FHA loan two years after the discharge date. Also, if you had late payments all in a distinct time frame and had a good payment history following that, they will overlook those imperfections. Collections are not a problem. If, however, you have had any federal liens, like tax liens or defaults on student loans, then you will not be eligible for an FHA loan. Your credit score needs to be only a 620 when putting down the minimum three percent. Other conventional loans require a score of 720 or higher for prime rates.

Down Payment

The best advantage of an FHA loan over conventional loans is the low cash needed at closing. Most first-time home buyers do not have the funds available to put 20 percent down plus pay closing costs. The FHA requires only 3 percent of the loan value to be paid at closing. Some of these funds can come from a gift from a family member also. They will allow for 6 percent in seller concessions, meaning the seller can pay up to 6 percent of the closing costs.

Rates

FHA loans have very competitive rates. This will equate to a lower payment every month. By having a lower interest rate, you will pay much less over the life of the loan. The FHA often offers lower rates than a traditional 30-year fixed loan.

Application Ease

The FHA is fairly lenient about whom they will lend to. As long as you meet the credit requirements, have the 3 percent down payment and have steady employment, you will likely be approved. It can be an easier application process than a conventional loan.

Debt to Income

The FHA allows a high debt-to-income ratio. If you have a car loan, student loans and credit cards, you can still qualify. Perhaps you are getting a raise later in the year but want to buy now. Or maybe your car will be paid off in six months. As long as you feel you can afford the payment, the FHA will allow a 50 percent debt-to-income ratio. This is determined by adding up all of your debt, including your proposed new mortgage payment, and dividing it by your monthly income to receive a percentage.