FHA mort­gages can be boon to bor­row­ers

The bor­rower must have a credit score of at least 580 and be able to af­ford a min­i­mum down pay­ment of 3.5 per­cent.

Boston Herald - - HOME SM@RT - By CHRIS­TEN NI­CHOLS BANKRATE.COM Visit Bankrate on­line at www.bankrate.com.

If you’re con­cerned about get­ting ap­proved for a con­ven­tional mort­gage, keep your dreams of home­own­er­ship alive by con­sid­er­ing a mort­gage in­sured by the Fed­eral Hous­ing Ad­min­is­tra­tion. For bor­row­ers who meet FHA re­quire­ments, this mort­gage al­ter­na­tive is a ter­rific way to buy a home with a low down pay­ment and less-than-perfect credit.

What are the re­quire­ments for an FHA loan?

In or­der to ob­tain ap­proval for an FHA loan, the bor­rower must sat­isfy the fol­low­ing re­quire­ments:

Steady em­ploy­ment his­tory. Bor­row­ers typ­i­cally must have been reg­u­larly em­ployed within the past two years. Self-em­ployed bor­row­ers have to prove that their business has drawn sta­ble in­come for at least two years; ver­i­fi­ca­tion, such as tax re­turns or com­pany doc­u­ments, is re­quired.

Abil­ity to pay. This is de­ter­mined by two for­mu­las: the front-end ra­tio and the back-end ra­tio. The front-end ra­tio refers to the en­tire amount that the bor­rower spends on hous­ing costs, and it must be less than 31 per­cent of the bor­rower’s gross in­come, with some ex­cep­tions that push limit up to 40 per­cent. This in­cludes ex­penses such as the prin­ci­pal, in­ter­est, prop­erty taxes, home­own­ers as­so­ci­a­tion fees, mort­gage in­sur­ance, and home­owner’s in­sur­ance. A bor­rower’s back-end ra­tio, also known as the debt-to-in­come ra­tio, en­com­passes all of the bor­rower’s debts, in­clud­ing the mort­gage pay­ment, credit debt, and per­sonal loans, and it should be less than 43 per­cent.

Fi­nan­cial sound­ness. The bor­rower must have a credit score of at least 580 and be able to af­ford a min­i­mum down pay­ment of 3.5 per­cent. Some in­sti­tu­tions may ac­com­mo­date lower credit scores if the bor­rower is able to make a larger down pay­ment. He or she must be a min­i­mum of two years out of bank­ruptcy and not have a fore­clo­sure in the past three years. All fed­eral stu­dent loans and in­come taxes must be cur­rent.

Res­i­dency. The bor­rower must be a law­ful U.S. res­i­dent with a valid So­cial Se­cu­rity num­ber, and must be the oc­cu­pant of the home.

What costs are associated with an FHA mort­gage?

Like con­ven­tional mort­gages, there are costs associated with FHA loans that the bor­rower has to pay when the loan closes, in­clud­ing lender fees, pre­paid in­ter­est, in­spec­tion ex­penses, and at­tor­ney fees. The FHA mort­gage pro­gram per­mits lenders and prop­erty sell­ers to pay some or all of the buyer’s clos­ing costs.

To in­sure the mort­gage against de­fault, the bor­rower must also pay an an­nual mort­gage in­sur­ance pre­mium. The MIP varies based on the terms of the loan, in­clud­ing the prin­ci­pal, loan-to-value ra­tio, and term. On av­er­age, ex­pect to pay 0.85 per­cent of the loan amount each year.

Bor­row­ers may be re­quired to pay a one­time ad­di­tional mort­gage in­sur­ance fee at the time of clos­ing, called the Up-front Mort­gage In­sur­ance Pre­mium. As of 2017, the UFMIP is equal to 1.75 per­cent of the mort­gage.

Want to learn how long it’ll take you to pay off your mort­gage? Run the num­bers through Bankrate’s mort­gage cal­cu­la­tors.

What are the dis­ad­van­tages of an FHA mort­gage?

Be­cause an FHA loan per­mits a lower down pay­ment, you can ex­pect to pay more in­ter­est over the life of the loan than you would with a con­ven­tional mort­gage that ne­ces­si­tates a larger down pay­ment.

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