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FHA financing in US, in a nutshell
Is Federal Housing Administration financing a good choice? Yes or else it would not have been used by 30 million people. Is conventional financing bad? No. It is just a matter of which service suits your requirements the best
FEDERAL HOUSING Administration (FHA) loans are offered by thousands of lenders and are readily available nationwide and because they all offer identical terms and services, it is worth your while to shop around to get the best possible rates when you either finance for the first time or refinance.

FHA financing is a basic mortgage programme implemented by the Federal government in the 1930s with the objective of offering affordable mortgage loan to people who either have had credit problems in the past or are first time home buyers or have low or moderate incomes.

It has grown in popularity and is today a choice worth considering by any borrower. FHA financing has no hidden fees or high increases that may result in foreclosure down the road. The borrower gets both financial security and peace of mind.

FHA rates are lower than conventional rates and you are not subjected to pre-payment fees. You can get fixed-rates with FHA, which has a big impact on your monthly repayments and because your monthly repayments are set, you can budget long term. You do not need exorbitant deposits – just three per cent of the loan amount will do. Other financial institutions insist borrowers prove cash reserves when they close the deal and this means that beside the deposit, you get heaps of money in savings, something not attainable by the majority. FHA does not ask for reserves.

On top of this, FHA allows owners to provide anything up to a six per cent cap of the sale price. This can be in the form of what is called ‘seller contributions’. In the event of a market being slow or where sellers use their rights to move homes, seller contribution credits secured by the owners can be put toward paying the buyer’s closing costs.

Except for the deposit, this may even cover all of the buyer’s closing costs. A word of caution though: contributions by the seller must be attained in writing and must be part of the purchase agreement, which is inspected by the provider of the loan. Borrowers must provide sufficient proof of income to demonstrate the ability to pay the mortgage.

Requirements of a conventional loan applicant include excellent credit, job stability with sufficient income, a sizable down payment and low debt to income ratios. Borrowers who meet Fannie Mae guidelines are rewarded with an interest rate only slightly lower than an FHA interest rate.

Credit issues affect many people and if you have ever been faced with bankruptcy or foreclosure then the FHA option is your best bet when looking for a mortgage. FHA is more relaxed and lenient toward your application. The criterion is that if you have been subject to bankruptcy, it must have been a year previously to the loan application under Chapter 13 Bankruptcy or two years under Chapter 7 Bankruptcy. Conventional financial institutions may not even look at you under these circumstances.

FHA qualifying criteria are that you have permanent employment and can prove you are able to cover your monthly repayments. They also require you produce some sort of credit history and if you do not have what is called traditional credit, you can use items like utility payments, past rental records, insurance policies or any other report from approved credit providers.

FHA has unusually liberal standards for qualifying and may allow you to borrow a lot more than conventional loan companies. With FHA programmes, as much as 43 per cent of your monthly income can be allocated to recurring monthly costs like mortgage payments and vehicle payments. If you qualify, FHA can provide you with 100 per cent of the loan. As borrower, you are liable for the initial insurance premiums, which comes to about 1.5 per cent of the loan amount but this amount can be absorbed into the loan, if need be.

Your repayments will be 0.5 per cent of the total loan amount divided into 12 months and a three per cent deposit is required, however no reservations are needed and it can take the form of a gift but cannot be absorbed into the loan amount. Closing costs are your liability but can also be funded in the loan amount.

Conventional institutions stipulate the borrower have five0 per cent for the deposit as well as 2 months’ reserves in the bank and will not fund closing costs in the loan amount.

You do not have to be a citizen to quality for an FHA loan. You can be either a permanent or a non-permanent resident. If you are a permanent resident, you need to prove this via documentation supplied by the Bureau of Citizenship and Immigration Services (BCIS) who are part of Homeland Security. In the case of non-residency, you need to prove that you can legally work in the country and to do this you will need to produce your Employment Authorisation Document issued by the BCIS.

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