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Is an FHA Loan Right for You?

Posted: 13 May 2013 12:33 PM PDT

Since the Great Depression of the 1930s, the U.S. government’s Federal Housing Administration (FHA) has provided a form of mortgage insurance to back loans made to Americans who would not otherwise qualify for a home loan. Over the years, FHA-insured loans have allowed consumers all across the country to become homeowners. The program allows borrowers to become buyers with a low down payment, typically as low as 3.5 percent. Today, the program is under pressure and some worry that soon these loans may fall out of favor.

After the subprime loan crisis began in 2007 and subprime lenders left the market, FHA loans became the primary method for lower income homeowners to qualify for a mortgage loan. Overnight, the FHA’s share of the market skyrocketed from around 4 percent of all loans to over 15 percent of all new loans and 30 percent of new home purchase loans.

Many believed that this would put undue stress on the agency and lead to higher delinquencies and losses for the agency. A study released by the Federal Reserve Bank of New York and New York University in July 2012 estimated that 30 percent of the loans originated by the FHA between 2007 and 2009 would be delinquent within 5 years.

The FHA has maintained that it is loaning money to people who are more creditworthy than in the past. However, last month (April), the agency increased the mortgage insurance premiums it charges consumers who take out FHA loans. FHA mortgage insurance traditionally remained an expense for borrowers until the loan amount due fell below 80 percent of the total value of the property. Lenders call that calculation the Loan-to-Value or LTV ratio. Next month (June), the agency will make another change that will require FHA borrowers to pay mortgage insurance premiums for the life of the loan.

Some say this will add thousands of dollars to the price of a home for FHA borrowers. Others point to the fact that most people refinance into new loan products about every 7 years, which would allow FHA borrowers to refinance into a conventional loan and possibly avoid mortgage insurance premiums long before their home was paid off.

FHA insures loans written by FHA-approved lenders who set their own rates and fees, so the only way to know for sure if an FHA loan will meet your needs is to talk to a qualified lending professional. While these government-insured loans are going through some changes right now, they are still likely to serve the needs of many homeowners in the years ahead.




Down Payment from Gift Money


It’s not uncommon for first-time home buyers to ask: “Can my mom and dad give me money to help me buy this house?”

The good news is yes, you can receive a gift from your parents to buy a house, but the way that you actually receive the gift is very important. Mom and dad can’t just leave money under your pillow like the Tooth Fairy did when you were younger.

The process of accepting a gift for your down payment isn’t complicated, and by following these simple rules, you can be sure that the underwriter who is reviewing your file will look at it with an approving eye.

Write a gift letter

If someone is going to be gifting you money to help you buy a house, you’ll first need a gift letter. The gift letter needs to be a short, sweet letter that is hand-signed by you and the person giving the gift. It needs to contain the following:

  • The relationship between the home buyer and the person giving the gift.
  • The amount of the gift.
  • The address of the home being purchased.
  • A statement that the money is a gift and not a loan that must be paid back.

Establish a paper trail

Next, you’ll need to create a paper trail. This is important because underwriters will look for where the money came from and where it went. In simple terms, they will look for proof that the money came from your parents’ account and went into yours.

Each situation will be slightly different, but be ready to provide paper proof of your parents’ account having money in it, money coming out of that account, a deposit into your account and proof that your account now has the money in it. Accuracy matters when creating this paper trail, so make sure each transaction is for the exact amount of the gift.

Write a gift letter and use this shortcut

Creating a paper trail correctly has proven to have its fair share of hassles. Getting copies of transactions is time-consuming, and underwriters seem to question every little thing in the process (“where exactly did the $10,000 transfer that I see coming into mom and dad’s account come from?”).

The good news is that there’s a shortcut when it comes to gift letters — one that makes the entire process easier.

Simply add one sentence to the letter that says: “Will wire the gift directly to escrow at time of closing.”

If you add this line to your gift letter, you can avoid all of the paper chasing that most underwriters will require. A day or two before closing, you can get wiring instructions from your escrow agent for mom and dad to wire the exact amount of the gift directly to the escrow company working on your transaction.




It is a great time to buy.



Mortgage rates are low, sellers are motivated, owning a home is a great investment in your future, and can lead to many years of happy memories.



A home not only provides financial benefits but it also provides shelter and security to families. Did you know that:

Home owners move less often and are more likely to vote and volunteer time for political and charitable causes than renters?

Children of homeowners tend to perform better in school and attain higher levels of education than children of parents who do not own a home?

Dollar for dollar, the rate of return on an individual’s cash down payment on a house is substantial? Given the leverage in purchasing a home, the average return on a 5% down payment over 10 years is usually three to five times greater than stock market returns?

When you own a home you may be able to deduct the property taxes and mortgage interest from your income taxes?

In most cases the gains that you make when you sell your primary residence are tax free?




When Buying a  House

Thou Shalt Not


Quit your job, change jobs, or become self employed.


Buy a car or van.  Even when shopping car dealers accessing your credit pushes it down.


Use charge cards for large purchases, or fall behind on payments.


Spend the cash you will need for closing (downpayment, insurance, repairs, moving, etc)


Forget, omit, lie about, or conceal information needed to obtain financing.


Make large purchases for your new home (furniture, riding lawn mowers, outdoor grills, etc)


Allow credit inquiries to the credit agencies while shopping for anything.


Make transfers, deposits, withdrawals of large sums from accounts without talking to your lender.


Change accounts, open credit, close credit to add information to the credit bureaus.


Allow others to use your credit or co sign for another.




Tips for Finding the Perfect Neighborhood


The neighborhood you choose can have a big impact on your lifestyle—safety, available amenities, and convenience all play their part.


  1. Make a list of the activities—movies, health club, church—you engage in regularly and stores you visit frequently. See how far you would have to travel from each neighborhood you’re considering to engaging in your most common activities.


  1. Check out the school district. The Department of Education in your town can probably provide information on test scores, class size, percentage of students who attend college, and special enrichment programs. If you have school-age children, also consider paying a visit to schools in the neighborhoods you’re considering. Even if you don’t have children, a house in a good school district will be easier to sell in the future.


  1. Find out if the neighborhood is safe. Ask the police department for neighborhood crime statistics. Consider not only the number of crimes but also the type—burglaries, armed robberies—and the trend of increasing or decreasing crime. Also, is crime centered in only one part of the neighborhood, such as near a retail area?


  1. Determine if the neighborhood is economically stable. Check with your local city economic development office to see if income and property values in the neighborhood are stable or rising. What is the percentage of homes to apartments? Apartments don’t necessarily diminish value, but they do mean a more transient population. Do you see vacant businesses or homes that have been for sale for months?


  1. See if you’ll make money. Ask a local REALTORÒ or call the local REALTORÒ association to get information about price appreciation trends in the neighborhood. Although past performance is no guarantee of future results, this information may give you a sense of how good an investment your home will be. A REALTORÒ or the government planning agency also may be able to tell you about planned developments or other changes in the neighborhood—like a new school or highway—that might affect value.


  1. See for yourself. Once you’ve narrowed your focus to two or three neighborhoods, go there, and walk around. Are homes tidy and well maintained? Are streets quiet? Pick a warm day if you can and chat with people working or playing outside. Are they friendly? Are their children to play with your family?


8 Steps to Getting Your Finances in Order




  1. Develop a family budget. Instead of budgeting what you’d like to spend, use receipts to create a budget for what you actually spent over the last six months. One advantage of this approach is that it factors in unexpected expenses, such as car repairs, illnesses, etc., as well as predictable costs such as rent.


  1. Reduce your debt. Generally speaking, lenders look for a total debt load of no more than 36 percent of income. Since this figure includes your mortgage, which typically ranges between 25 percent and 28 percent of income, you need to get the rest of installment debt—car loans, student loans, revolving balances on credit cards—down to between 8 percent and 10 percent of your total income.


  1. Get a handle on expenses. You probably know how much you spend on rent and utilities, but little expenses add up. Try writing down everything you spend for one month. You’ll probably see some great ways to save.


  1. Increase your income. It may be necessary to take on a second, part-time job to get your income at a high-enough level to qualify for the home you want.


  1. Save for a downpayment. Although it’s possible to get a mortgage with only 5 percent down—or even less in some cases—you can usually get a better rate and a lower overall cost if you put down more. Shoot for saving a 20 percent downpayment.


  1. Create a house fund. Don’t just plan on saving whatever’s left toward a downpayment. Instead decide on a certain amount a month you want to save, then put it away as you pay your monthly bills.


  1. Keep your job. While you don’t need to be in the same job forever to qualify, having a job for less than two years may mean you have to pay a higher interest rate.


  1. Establish a good credit history. Get a credit card and make payments by the due date. Do the same for all your other bills. Pay off the entire balance promptly.


8 Ways to Improve Your Credit



Credit scores, along with your overall income and debt, are a big factor in determining if you’ll qualify for a loan and what loan terms you’ll be able to qualify for.


1.      Check for and correct errors in your credit report. Mistakes happen, and you could be paying for someone else’s poor financial management.


2.      Pay down credit card bills. If possible, pay off the entire balance every month. However, transferring credit card debt from one card to another could lower your score.


3.      Don’t charge your credit cards to the maximum limit.


4.      Wait 12 months after credit difficulties to apply for a mortgage. You’re penalized less for problems after a year.


5.      Don’t purchase big-ticket items for your new home on credit cards until after the loan is approved. The amounts will add to your debt.


6.      Don’t open new credit card accounts before applying for a mortgage. Having too much available credit can lower your score.


7.      Shop for mortgage rates all at once. Too many credit applications can lower your score, but multiple inquiries from the same type of lender are counted as one inquiry if submitted over a short period of time.


8.      Avoid finance companies. Even if you pay the loan on time, the interest is high and it will probably be considered a sign of poor credit management.


This information is copyrighted by the Fannie Mae Foundation and is used with permission of the Fannie Mae Foundation. To obtain a complete copy of the publication, “Knowing and Understanding Your Credit,” visit http://www.homebuyingguide.org.


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