By Brian O’Connell
Current efforts to make it easier for Americans to buy and keep their homes look a lot like a kids’ game of musical chairs.
On the outside, it seems that there’s plenty of room for everyone looking for financial help in buying or refinancing a home. But, when the music stops, there are plenty of home mortgage customers still standing, especially those customers with bad credit.
The fact is, most good loan refinancing programs only go to those home mortgage customers with good credit -- usually with a FICO credit score of 720 or higher. While plenty of good mortgage deals are also available to those with credit scores a tad lower, like 660 or 670, those consumers tagged with a “bad” credit score, typically 620 or lower, just aren’t invited to the home mortgage party. But even if they are, they’ll likely face home mortgage hurdles like having to pay for pricey insurance or they’ll be required to put 20% down before they can close on a loan.
One often-overlooked option for home mortgage customers saddled with a lousy credit score is a home loan through the Federal Housing Administration (FHA). The FHA has been around since 1934, but it fell out of favor around the year 2000, as low-monthly payment adjustable-rate mortgages (ARMs) began to surface. But with ARM’s in decline, the FHA loan is a real meat-and-potatoes deal that promises low down payments, low closing costs, and easy credit qualifying.
So how does the FHA’s home mortgage program work? For starters, the FHA doesn’t exactly issue home loans, but they do insure home mortgages that fit their profile guidelines. Also, the FHA doesn’t ask for 20% down for loans it approves and down payments as low as 3.5% are not uncommon with FHA-approved home loans.
Interest rates for FHA-approved home loans aren’t as low as some private mortgage lenders, but they’re in the ballpark. FHA loans don’t have prepayment penalties, and the application process is fairly straightforward. When applying, expect to deliver two years’ worth of tax returns, a year’s worth of bank statements, and any retirement or investment-related portfolio statements. Before the sub-prime tsunami hit, those documents were standard fare for home mortgage applications and now they’re back again.
To qualify for an FHA-approved loan, focus on your debt-to-income picture on a monthly basis. Your proposed monthly mortgage payment should not be more than 31% of your monthly income. In addition, your total debt payments should not exceed 43% of your monthly income.
For more information on how to connect with an FHA home mortgage loan, visit the agency’s web site at http://www.hud.gov/buying/loans.cfm.
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