FHA Strategies For First-Time Home Buyers
The FHA has insured over 37 million home mortgages since it was made in 1934, also proceeds to help low- to moderate-income buyers purchase their first house. Even though the FHA does not lend money to borrowers, it will provide insurance to lenders in order that they can accept borrowers. This does not signify the FHA accepts every first-time home buyer mortgage application. All applicants should meet FHA guidelines to guarantee they can afford the mortgage.
Debt Ratios
The FHA sets borrowers debt ratio limits to ensure they do not overstretch their obligations. Your debt ratio shows what portion of your income you spend on fixed expenses, including credit cards, car loans and mortgages. The FHA’s guidelines establish the debt ratio to be qualified for financing in 41 percent. That is, if you earn $1,000, your fixed expenses can’t exceed $410 (including your FHA mortgage) to qualify.
Closing Costs
The FHA does not decide the final prices of FHA loans lenders do. On the other hand, the FHA does provide guidelines on which charges are allowable and what prices are reasonable. For instance, the FHA allows lenders to charge home inspection charges, but only around $200, lawyer’s fees, lender origination fees, move stamps, recording fees, taxes and record preparation fees, but only if done by a third party. According to the Federal Reserve’s Consumer Guide To Mortgage Settlements Costs, FHA fees amount to approximately 1.75 percent of the loan balance.
Mortgage Insurance
Mortgage insurance protects the FHA from borrowers that do not pay their mortgages. The FHA requires all borrowers to cover a mortgage insurance. The mortgage is around 0.5 percent of the loan balance a year and a 1.5 percent upfront mortgage insurance premium. When borrowers have paid over 22 percent of the value of the mortgage they are required to cover mortgage insurance.
Loan Limits
FHA guidelines establish the loan borrowers are able to apply for by country and county based on neighborhood income levels. For instance, the loan limit for an FHA loan in San Francisco is $729,750 for a single family home.