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Common Problems With FHA Loans

by Jon Smith, CRB, CRS, GRI

If you're planning to buy a home and are researching the different types of financing, you might apply for an FHA mortgage.

This type of mortgages are great for first-time homebuyers, buyers, buyers with bad credit as well as those homebuyers who do not have the funds for 20% downpayment.

With an FHA loan, it helps banks mitigate this risk by insuring otherwise risky borrowers' mortgages. The FHA agrees to pay the difference between what a home gets at a post-foreclosure auction and what's still owed on the home when a borrower defaults.

With the sluggish economy and problems with the real estate market, the FHA may soon begin tightening its loan standards, leaving some borrowers without the financing they need.

Below are a few of some potential roadblocks you might encounter if you are applying for an FHA loan, and how to get through them.

  • The FHA requires a new property to be livable from day one. As a result, the agency has a strict inspection requirement intended to catch any potential health or safety hazards. You should make sure everything is in working order and address things like a broken window, or a broken fire alarm, as these can create significant delays in the buying process. It is of course difficult to repair these issues if you are not yet the property owner but you will need to communicate with the seller and negotiate the necessary repairs.
  • The FHA also has limits for how high a borrower's debt-to-income ratio can be. It will be more difficult for homebuyers who have more than 30 percent of their monthly income on a mortgage payment or 43 percent on all debts combined. Below are also some additional requirements borrows will need to face:  Show consistent or increasing income, have a steady employment record (at least 2 or more years with the same employer) as well as have no bankruptcies in the last two years.
  • Another issue is that if the property appraisal comes in below the price you've negotiated, the deal is off. A possible solution is that the buyer could try to come up with a larger down payment to help to make up the difference between the appraisal and the negotiated price or possibly negotiate a new price based on the appraisal. Buyers have the advantage in today's real estate market, so the chances of a motivated seller accepting a lower price is good.            

 

Is an FHA-Insured Mortgage Right for You?

by Jon Smith, CRB, CRS, GRI

The days of putting little money down to buy a home aren’t over.

After years of risky mortgages backed up by small down payments, most lenders aren’t underwriting mortgages without a significant sum up front and a high credit score. But a decades-old loophole can still put home buyers in a house for next to nothing. Mortgages insured by the Federal Housing Administration (FHA) allow borrowers to get approved with a down payment as small as 3.5% of the agreed selling price of the house and don’t require a high credit score.

As millions of Americans have come to realize, getting into a house for little money down has its disadvantages. Borrowers who’ve pumped little equity into their home are often more willing to walk away from it during lean times that keep them from making payments; this risk is further elevated when home values are in decline and troubled borrowers are unable to refinance or sell the home at a price that covers their losses.

Still, FHA-insured mortgages are far less risky than the subprime mortgages that lenders originated before the housing bust. FHA-insured mortgages require documentation and verifiable proof that the borrower is capable of making their monthly payments. (Most subprime mortgages didn’t require such proof.)

The looser terms of FHA-insured mortgages have helped make them more popular. Today, FHA-insured mortgages make up about 25% of the mortgage market, up from 3% in 2006, FHA commissioner David Stevens said in a speech earlier this month. In June, the FHA insured 194,000 loans – the highest monthly total in the agency’s history, according to Stevens. For fiscal year 2009, the dollar amount of FHA-insured mortgages is likely to reach 30% of mortgage originations, up from around 4% in 2005 and 2006, says Stu Feldstein, the president of SMR Research, a mortgage-data tracking firm.

“FHA-insured mortgages are one of the only games in town, especially if you can’t qualify for a traditional mortgage,” says Gibran Nicholas, the chairman of the Ann Arbor, Mich.-based CMPS Institute, which trains and certifies mortgage lenders and brokers. “Now that the subprime market is gone, FHA is filling the gap.”

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Photo of Jon Smith, CRB, CRS, SRES, SFR Real Estate
Jon Smith, CRB, CRS, SRES, SFR
Iowa Realty
3521 Beaver Ave.
Des Moines IA 50310
515-240-2692
Fax: 515-453-6404
 

 

 

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