FHA Mortgage: How to evaluate whether it is appropriate for you?
The lenders are trying to lower their risk by avoiding underwriting mortgages without significant amount of down payment and high credit score. In this scenario, the percentage of people buying a home has dropped significantly. However, in this situation, Mortgages insured by the Federal Housing Administration (FHA) provides loan on small amount of down payment of 3.5% along with moderate credit score.
Most borrowers think that there are disadvantages of taking out a loan with a low down payment. Borrowers who make low down payments are a greater risk of default on payment during tough economic scenarios. However, the problem increases when home values drop and distressed borrowers are unable to refinance or sell the home at a price that covers their losses.
FHA mortgages are less tricky than sub prime mortgages that the lenders introduced before the housing bust. If you’re planning to apply for an FHA insured mortgage, then you’re required to provide necessary documents as well as verifiable proof that you’re capable of repaying the owed amount. Therefore, before applying for an FHA loan, make sure you determine whether an FHA mortgage is beneficial for you.
Here are some of the points you need to consider to determine whether an FHA mortgage is beneficial for you:
¨ Qualifying eligibility criteria:
The FHA-insured mortgage borrowers need to have stable source of income and not required to be rigid with their credit history. The lender may review the financial scenario of the borrower instead of only focusing on the credit score. The financial scenario is inclusive of the borrower’s rental or mortgage payment history, debts, collections, previous foreclosures and bankruptcies.
The first time home buyers mostly apply for the FHA-insured purchase-mortgages as the down payment is 3.5%. If you’re planning to apply for an FHA mortgage, then you’re required to prove that you’ve enough cash to close the mortgage by providing recent bank statements. Your debt to income ratio will need be examined to determine ability to repay the note.
¨ Lender’s protection to lower his risk:
The applicant of an FHA loan can obtain it as the lender does not risk his money on borrower’s default of payments.
The FHA backed lenders are provided an insurance claim equal to the sum of the unpaid principal balance of the loan, interest and a portion of the foreclosure expenses.
¨ Borrower’s benefit of taking out an FHA loan:
If the borrower defaults on his/her mortgage payment, then the lender needs to work with them to avoid foreclosure.
The borrower can lower his/her monthly payment with the help of this program. Therefore, to qualify for the program the borrower is required to keep up with his/her mortgage payment, but can’t default on payment more than a month. In reality, this program can help to prevent foreclosures, but it doesn’t guarantee that the borrower can retain his home.
Therefore, you need to consider the above mentioned points when you’re determining whether an FHA mortgage is suitable for you.