Federal Housing Administration (FHA) home mortgage program is great choice for Jacksonville home buyers in 2015. The FHA still only requires 3.5% for a down payment which is perfect for first time buyers that have little savings for down payment. Below we will discuss some important factors to determine if the FHA loan program is right for you.
First you need to understand that FHA do not actually make loans. Instead, FHA insures or backs the loans made by lenders and approved banks here in FL. This means if the homeowner defaults, the FHA will cover most the losses for the bank or lender. The FHA program allows some of the most easiest lending standards in the market for 2015. The program is a great fit for first-time buyers, those with small down payments and those with less than-perfect credit. The FHA is also not a product for everyone and not all lenders offer FHA loans. Here’s a look at the pros and cons of FHA insured loans:
First the Pros of the FHA Program:
- Down payment. The minimum down payment is 3.5 percent and the FHA allows the money to come from a family member, charitable organization or even an employer. Most conventional loans require at least 10% down and require the borrower to prove he has the down payment amount.
- Interest rate. FHA loans usually offer the lowest interest rate of any program. Lenders of conventional loans see more risk in a comparable loan and, so, have a higher interest rate.
- Shaky credit: Applicants with credit problems, even a past bankruptcy over 3 years ago, may be able to qualify for an FHA loan. The FHA puts more emphasis on income, length of employment and job security than do lenders of conventional loans. However, the min accepted credit score for most lenders and banks is 640.
- Higher Debt-to-income ratios. The FHA allows a ratio of 29 percent — of mortgage payment to income (divide the mortgage payment by gross monthly income.) or 41 percent of all monthly debt to income (divide all your monthly debt such as auto loans and credit card payments by gross monthly income.) Conventional loans usually only allow 28 percent and 36 percent, respectively.
- No prepayment penalty. The FHA does not allow prepayment penalties, which some conventional loans require if you pay off the loan early. This penalty is charged because lenders are trying to keep people from habitually refinancing. Usually, lenders waive the penalty if the home is sold.
- Closing costs. The FHA allows closing costs to be paid by the home seller – up to 6% which is normally enough.
Some of the “Cons”
- Higher mortgage insurance. FHA loans require a Mortgage Insurance Premium (MIP), which is similar to the Private Mortgage Insurance charged in conventional loans with less than a 20 percent down payment. The FHA MIP requires paying 1.75 percent of the loan amount up front and .85% (in the case of 3.5% down payment) More details on FHA mortgage insurance can be found here. PMI on conventional loans is usually less expensive.
- Loan limits. The FHA has limits on the amount that can be borrowed because the program is designed for low- to moderate-income buyers. These limits are based on where the house is located, Duval, St. Johns, Clay, Nassau and other Florida counties have different loan amount limits. The loan amount limits can also change at any time, check here for the loan amount limits.
- Must be owner-occupied. An FHA loan requires the home, or one unit in a multi-family complex, be occupied by an owner. So, this program is not for investors looking to buy property to rent out.
When should a Jacksonville homebuyer to consider an FHA loan?
Simply put, the FHA option makes sense only when there is no alternative. The FHA accepts applicants with lower credit scores, typically 640 or above. You can also get away with a higher debt-to-income ratio, meaning that when all your housing costs are compounded, from insurance to taxes to mortgage payments, the amount is under a certain percentage of your income. To qualify for an FHA loan, that number is about 47 percent, whereas with conventional loans, it might be about 38 to 40 percent, The FHA also offers loans with down payments as small as 3.5 percent, and that down payment can come from gifts from family and friends, not just your savings.
When an FHA loan is not the right choice?
Do you have 10% or more for a down payment? Do you have clean credit with a credit score over a 680? Are you looking to purchase a higher priced home over the FHA loan limits? You may be better off looking closer at the conventional mortgage.
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If you are a homebuyer looking for purchase a home just outside of Duval County / Jacksonville, please sure to look into the 100% USDA loan by clicking here. Many locations like Callahan, Yulee, Fleming Island, Green Cove Springs, Julington Creek and south Orange Park are currently eligible for USDA financing.