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FHA Loans: What are they and do you qualify?

Home ownership has long been a major part of the American Dream. Yet for many Americans, the skyrocketing price of real estate makes it impossible for them to save enough money to qualify for an adequate mortgage let alone buying a home outright. That’s why the Federal Housing Administration of the United States Department of Housing and Urban Development has a loan insurance option that allows first-time buyers or anyone without a lot of money for a down payment to purchase a home.

By guaranteeing lenders won’t lose all of their money if you default on your home loan, FHA’s insurance program increases the number of potential home buyers who are able to secure a loan from the lending institution of their choice. While the FHA program does help qualified buyers secure home loans, not everyone is qualified.

The first measures of whether a potential home buyer will qualify for FHA assistance is whether he or she has a good credit history and whether he or she is employed or has enough income to handle a house loan. It is a good idea to start establishing a credit history as early as you can. You can do this by paying your utility bills, school loans, and car loans on time, or by applying for credit cards and paying the bills in a timely fashion. You may not qualify for a standard credit card right away, but most departments will issue their in-house charge card with very little proof of income, and using these cards is a good way to build a solid credit history. It is also a good idea to keep copies of bank statements, pay stubs and contracts as proof of steady income when you go to apply for a home loan.

Most lending institutions require a down payment equal to about 25 percent, or one quarter, of the full price of the home you wish to purchase. With real estate prices booming as they are, this goal is out of reach for many Americans. However, with an FHA-insured loan, qualified home buyers can secure a house loan with as little as a three percent down payment.

So how do you know if you qualify? Either before you begin looking for a home to buy, or after you have found one you think is a good prospect, do some simple calculations to find out how much of a home loan burden you can afford each month. To determine how much you can afford to pay, multiply your monthly income by .29. Most loan experts agree that spending 29 percent of your gross monthly income on housing costs is a reasonable burden for buyers looking to secure a FHA loan. The amount you get by multiplying your gross monthly income by .29 will give you that magic 29 percent figure. Total housing costs include more than your mortgage principal and interest costs. You also have to calculate your estimated property taxes and insurance, as well as utility costs such as heat, water and electricity. Your total monthly debt load, including payments for any long-term debt you may have, should not exceed 41 percent of your gross monthly income. These debt burden figures are slightly more favorable than conventional loans, which generally require a debt load one to five percent less than what is needed for an FHA loan.

Once you know how much you can afford to pay, you also have to figure out if you can raise enough cash to make a down payment equal to no less than two to three percent of the price you pay for your home. This money will be due on the date you close or settle the deal. You may actually need more than that amount to pay for private mortgage insurance, title insurance, title search fees, attorney’s fees, loan origination fees, discount points costs and any other relevant disbursements, so leave a financial cushion to handled these additional expenses.

Buying a home is exciting, but it is also an investment that requires planning and careful management. An FHA loan can help you buy the home of your dreams, but be sure you can afford the house you want to buy so that the dream does not turn into a financial nightmare.

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