Four Benefits of a FHA Loan

FHA loans are government-issued loans by the Federal Housing Authority. Actually, you will still get loans through private lenders but, you will be protected by the government, if you should default on your loan.

Here are some of the benefits of getting a FHA loan.

  • Lower down payments required to get a mortgage. Most loans require at least five to ten percent of the cost of the house as a down payment. Some require even more. With a FHA loan, you only need 3.5% down! Closing costs can be even more expensive and that can be added to your mortgage.
  • Lower mortgage insurance. Mortgage insurance is expensive and is included in your monthly costs. With a FHA loan, you might be able to pay less, essentially paying less money each month with your mortgage payment.
  • Competitive interest rates. When you get a FHA loan, you will get a competitive interest rate, no matter what your credit score is. This allows people who have less than desirable credit to own homes.
  • Higher debt ratio. When figuring out your debt ratio, you are allowed to have more debt with a FHA loan than you can with a conventional loan. If you have a car payment or two, along with credit card debt, you might be better off looking at a FHA loan!

FHA loans are helpful when you are just starting out and you don’t have a lot of money for a down payment. They are also helpful if you don’t have the best credit. They are also helpful when you have a little bit of debt. However, make sure that you can afford your house or you will end up losing your home!

Contact us to see if you qualify for a FHA loan!


How Much to Put Down on a Home Loan

Whether or not to buy a home is, for many, the single most important financial decision in their life. The second is how much to put down on a home loan. Your down payment plays an important part in the home loan approval process.

The down payment influences:

  • Loan-to-value ratio,
  • Private mortgage insurance,
  • Debt-to-income ratio,
  • Housing expense ratio, and
  • Interest Rate.

Loan-to-Value Ratio: This is the percentage a financial institution lends compared to the value of the property. If a home’s market value is $100,000, and one borrows $80,000 to purchase it, the loan-to-value ratio is 80 percent. While special loan programs exist, in today’s marketplace, one should expect to need a down payment of 20 percent for loan approval.

Private mortgage insurance: This is an insurance policy paid by the borrower. In case the homeowner defaults on their mortgage payments, and the financial institution is unable to recover costs through the foreclosure process, private mortgage insurance offsets the lender’s losses. You can avoid paying this cost with a 20 percent down payment.

Debt-to-income ratio: One’s debt-to-income is the percentage of your monthly income that goes toward paying their debt. This includes credit cards, car payments, child support, legal judgements, and more. One’s potential housing expenses are also included.

Each financial institution, and depending on the type of loan, has their own requirements. However, exceeding this ratio will negatively impact loan approval. The down payment affects the payment and, therefore, one’s debt-to-income.

Housing expense ratio: This is sometimes referred to as the payment-to-income ratio. It is the percentage of your monthly income going towards housing: mortgage payment (principal and interest), private mortgage insurance, homeowner insurance, property taxes, et al. The housing expense ratio becomes difficult to understand for some home buyers.

An example is a bank requiring no more than 33 percent of one’s monthly income going toward housing expenses. However, these expenses are added into one’s debt-to-income calculation. The percentage limit decreases with the more debt one owes. As with the overall debt-to-income, your down payment lowers your loan payment and affects the housing expense ratio.

Interest rate: The interest rate represents your cost to borrow the funds for the home purchase. Your down payment is your initial investment. It creates instant equity in the property and lessens the lender’s risk. For this reason, many financial institutions will give a better interest rate with a higher down payment.

If you would like more information or to talk more about how much to put down on a home, please contact us.