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Buying A House Using An FHA Loan

Government-insured mortgages provide an alternative option for homebuyers who fail to qualify for conventional mortgages because of credit, income, or asset issues. Out of several loan options available, the FHA Loan programs are some of the most patronized among first-time home buyers and applicants with less-than-perfect credit.

Like conventional loans, FHA mortgages are also originated by private lenders. What makes them special is that FHA loans are insured by the HUD. Thus, lenders are protected against financial risks and losses, should any of the borrower defaults. It is the backing of the federal government that allows lenders to ease approval standards for this specific program.

Advantage of FHA Loans

FHA loans welcome homebuyers from all walks of life. Anybody who wants to take advantage of its less stringent qualification requirements, more relaxed underwriting guidelines, and lower down payment requirements may apply for the mortgage program through FHA-approved lenders.

Anybody with a credit score of at least 580 may qualify for an FHA loan with only a 3.5% down payment. Applicants with credit scores below the minimum may qualify but are required to put a more substantial downpayment of at least (ten percent 10%). There is also a debt-to-income ratio limit, which currently stands at 50%; this means your accumulated debts (including the mortgage) must not exceed half of your gross income.

FHA Qualification Requirements

As with most loans, families, and individuals who wish to qualify for FHA loan should submit all necessary documentation and comply with all the requirements set by both the Federal Housing Administration. 

To qualify for an FHA mortgage, the applicant must:

  • Apply for a loan that is within the set FHA limit of the county;
  • Meet the required minimum credit score, which is at 580, to qualify for the 3.5% down payment;
  • Come up with funds for the down payment and closing costs, which may be in the form of “gifts.” Must provide their last 2 months bank statements and any other assets to be used as the source of funds to close on the loan;
  • Provide documents that support claims of stable employment such as their 30-day paycheck stubs, W2’s, tax returns, etc.;
  • Purchase a property to be used as the borrower’s primary residence

The Problem with FHA Loans

Even though FHA loans are so much easier to obtain than conventional ones, they are not as financially sound as they appear to be mainly because of the enormous mortgage insurance obligation that comes with them. 

Unlike most loans that only require a single premium mortgage insurance if the lender puts down less than 20% deposit, the FHA loan’s insurance is comparatively more expensive as it calls for two mortgage insurance premiums, paid throughout the life of the loan.  It is in this aspect of the loan that many homebuyers begin to have second thoughts and ponder on whether to go on with it or take more time improving their credit scores to someday qualify for a traditional mortgage.

The Bottom Line

It is worth mentioning, however, that the FHA’s unique insurance policy has not deterred many applicants. Tens of millions of Americans are proud homeowners, thanks to this particular government-backed mortgage.

by nico2me

3 Things to Consider When Looking at an Investment Property

An investment property is a great financial decision, bringing in extra income with minimal effort on your end once everything’s squared away. However, in order to ensure that you’re going to get the return that you’re looking for, we’ve outlined our top three factors to make sure you check out before making any decisions. 

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  1. Focus on Location 

While you will be able to renovate and change many aspects of a home, you’re stuck with its location. Thus, it’s important to consider the location over the actual inside of the home to ensure that you’ll be able to recoup any renovation costs down the line. While this may sound counterintuitive, you’ll be able to easily fix asphalt roof shingles or transform a kitchen into what you know renters will love with the relatively minimal quartz countertops cost. If the plot of land isn’t conducive to vacationers or isn’t in a competitive market, you could find yourself at a loss down the road. The location will also determine what your maintenance costs are going to look like, such as if there is a large yard that’ll require regular landscaping or a pool that’ll come with its own costs. If you’re eyeing a vacation rental property, also consider if it’ll need a property management service year-round as well. 

  1. Make Sure You’re Financially Prepared

An investment property is a large financial commitment, so you want to be sure that you’re prepared not only for the initial purchase itself, but additional costs that’ll likely come at you throughout the process. Real estate professionals refer to the “1% rule”, a rule that says you should expect to earn 1% of what you paid for the property every single month in order for it to be a good investment in the long run. The price of the property should include the projected costs of whatever renovations you’re expecting to have to make to the property. 

Furthermore, consider the expenses that are going to be recurring and can add a pretty penny to the purchase price of the property. Consider property taxes, insurance, HOA fees, and property management expenses you might need to add if you’re going to be doing a vacation rental property. Also make sure to prepare for repair costs, changes to the local economy, or potential raises in property taxes. While it’ll, of course, be difficult to predict the exact amounts upfront, it’s a good idea to have some wiggle room when it comes to your finances.  

researching investment properties
  1. Does the Property Have Good Bones?

Many people will say that a house has “good bones”, but what does that mean, exactly?

Well, the bones of the house refer to the foundation, roofing, layout of the rooms, and plumbing that contribute to the value of the house behind the scenes. While a dramatically beautiful kitchen is definitely an asset, if the roof is sinking or the foundation shows signs of distress, this may not be a good sign. 

Consider the construction materials that were used and if the foundation is solid. Wood Frame Building versus ICF foundations have their own pros and cons, and brick and concrete are generally regarded as safe bets. The roof is another place to look, as having to replace the roof can bring an unexpectedly huge cost. Make sure that the roof isn’t cracking or sinking in any spots; if it looks like there’s been minimal wear and tear, that’s a great sign. 

An investment property is an exciting financial decision that’ll bring you great benefits in the long run if you play your cards right. By focusing on location and the bones of the house while carefully considering your finances and how much house you can truly handle, this property can be earning you passive income in no time!  

Matt Lee is the owner of the Innovative Building Materials blog and a content writer for the building materials industry. He is focused on helping fellow homeowners, contractors, and architects discover materials and methods of construction that save money, improve energy efficiency, and increase property value.