Lending Lesson

The FHA Loan in a Nutshell

We know it’s easy to tune out at a party when real estate discussions veer away from luxury finishes and breathtaking views, and to obscure terminology, jargon and acronyms. It can be enough to make you pretend your phone is ringing just so you can step away from the snooze-fest.

We’ve been there.

But if you’re thinking seriously about purchasing property, one of those acronyms could make all the difference.

You’ve undoubtedly heard the terms “FHA loan” or “FHA approved,” at some time or other.  Maybe on HGTV or on one of those flyers you picked up at an open house. It’s pretty simple, really. The government (Federal Housing Authority) insures loans for approved lenders to reduce their risk of loss if the borrower defaults.

 Today, FHA loans are popular with first time home buyers for a couple of reasons:

  • They require a low down payment (3.5 percent  as opposed to the traditional 20 percent).
  • You don’t need perfect credit. (With maximum financing and a minimum down payment, a score of 580 will do.)
  • They can be “assumable” (a new buyer can take over the existing loan – a good deal for the buyer, especially when the rates are below the current market).

 Typical FHA loan requirements:

  • Steady employment history
  • Valid social security number
  • Lawful US residency
  • Must be of legal age to sign a mortgage (differs by state)
  • Your front-end ratio (mortgage payment + HOA fees + taxes +mortgage insurance + home insurance) must be less than 31 percent of gross income.
  • Your back-end ratio (mortgage payment + monthly debt payments – incl. credit card, school, and car payments) must be less than 43 percent of gross income.
  • Property must be appraised and approved by an FHA-approved appraiser (for condos, the entire development must be approved)

Maximum loan amounts vary by state and county.

Also, the borrower pays two mortgage insurance premiums. One must be paid upfront – currently, it’s 1.75 percent of the total loan (for those cases signed on or after April 9, 2012). The other is paid annually, though it’s figured into the monthly mortgage payments.  The amount of that one depends on the loan-to-value ratio, the size of the loan, and the length of its terms – it’s typically between 0.70 and 1.30 percent.

We agree that all this is dull party talk, but if you’re the girl still reading, and if your heart is pumping at the thought that this whole FHA thing might be the very difference between your status as renter or owner, then we’ve done our job.

Now, let’s have a drink and talk about how you’re going to decorate.

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Elizabeth Salaam
Along with her work as Senior Contributing Writer for Girl's Guide, Elizabeth Salaam writes for the San Diego Reader. Her work has also been published in Elle Magazine. | Most inspired by: Contradictions. | Favorite room in my home: The Master suite. The windows have views for days! | Best design idea I may never do: Adorn my enclosed toilet room with library book wallpaper and a chandelier. | Will never: Bungee jump. | Have always been: Rebellious. | Dying to: Live in a Paris flat with herringbone wood floors.
18 of 22 in Finance

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