One program that can be useful for buyers with challenging circumstances is FHA (or the Federal Housing Administration).
While FHA loans were initially designed for homebuyers of modest means with little down payment, they are increasingly being used by borrowers for their higher than average debt to income ratios or for those with minor credit issues.
Key Features of an FHA loan:
There are a few key features of an FHA loan that either make or break the suitability of it for a specific borrowers transaction.
The key feature to an FHA is that the borrower is only required to put about 3.5% down (or $3,500 per hundred thousand dollars of purchase price.
The first thing we ask a potential FHA borrower is the property type he wants to finance, it is very difficult to get a FHA loan on a condo in Eagle County as the entire condo project must be approved by FHA. This is a costly and time consuming process and is not worth it for a single FHA loan in a condominium community. There are only about 4-5 FHA approved projects in the County.
The second feature of an FHA loan is the mortgage insurance (MI). There are two MI fees on an FHA; the first is a one time one percent of the loan amount called an up front mortgage insurance premium. The second fee is a monthly charge for the life of the loan and generally it works out to be .90% of the loan amount divided by 12. So on a $100,000 loan one would have a monthly MI premium of $75.00 and a upfront MI premium of $1,000.00.
Any loan with less than 20% down payment or equity is subject to mortgage insurance. If a buyer can put 5% down he can often get a conventional loan which does not have the upfront MI and has a smaller month MI premium.
FHA loan income requirements:
The other aspect of an FHA loan is that the borrower usually is allowed a higher debt to income ratio that under conventional financing. In some cases up to 60% of the borrowers income can to go debt service as opposed to about 49% on a conventional loan.
Overall the interest rate on a FHA is close to a conventional loan, only the MI premiums are higher, the down payment requirements lower and the allowable debt ratios higher. In addition FHA will not work on a second home or investment property.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers. You can email him at email@example.com