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A Consumer's Guide to FHA Home Loans

FHA loans are very popular with buyers of both residential real estate and real estate investment properties. One of the major appeals of the FHA home loan is that it allows home buyers to purchase a home with as little as 3% down at the time of purchase. When compared to the typical 20% down payment required by many mortgage brokers, the appeal of the FHA home loan is obvious. Using an FHA home loan to buy a home is a great way for many first time home buyers, or for any buyer who is short on funds for a down payment, to get into the home of their dreams.

It is important to understand that the FHA does not make home mortgage loans itself. Instead, the FHA insures the loans made by others. The lender will be paid out of the FHA insurance fund should the buyer of the home later defaults on the loan. In order to qualify for an FHA backed home mortgage loan, a borrower will need to have a solid credit history, and a sufficient level of income to qualify for the amount to be borrowed.

When calculating how much the home buyer can afford to borrow on an FHA loan, the rule of thumb is that the total monthly housing costs should not be more than 29% of the borrower's total gross monthly income. For this calculation, the total housing costs include more than just the monthly mortgage payment. Things like property taxes and insurance are also calculated as part of the total cost of housing.

For instance, a potential home buyer with a gross monthly income of $3,000 per month, or an annual income of $36,000 should have total monthly housing expenses of no more than $870, or $3,000 times 29%. That means that the total housing costs each month, including interest and principal on the mortgage, real estate taxes and insurance premiums, should be no more than $870.

In addition, lenders will want to see that the home buyer's total monthly costs for housing and long term debt is no more than 41% of the gross monthly income. That is why it is a good idea to avoid taking on any additional debt, and to pay down current debt, before applying for an FHA backed home mortgage loan.

For that same home buyer with the $36,000 annual income ($3,000 per month), the total cost for interest and principal on the mortgage, home insurance premiums, real estate taxes and long term debt should no greater than $1,230 per month. Since the housing portion of that figure represents $870 per month, that leaves $360 for other long term debt payments. A higher level of long term debt may mean that the FHA mortgage will not be approved.

Even though these figures may seem stringent, they are actually more flexible than those offered on conventional mortgage loans. For instance, the total housing costs for a traditional mortgage are usually capped at 26%-28% of gross monthly income, and the total expense is generally allowed to go no higher than 33%-36%.

In order to find a FHA home loan, it is necessary to locate an FHA-approved mortgage lender. These lenders can be found either by searching the internet or by looking in the local telephone directory under real estate loans or mortgages.

Obviously, it is crucial to shop around for the best interest rate on an FHA backed loan since each individual lender sets the interest rates. It is also important to learn about the specific credit and income qualifications required by the lender. Keep in mind that the current cap on FHA loans is $151,725, but in some areas of the country this cap may be lower.

It is also essential to gather all necessary financial information, including pay stubs, tax returns, loan records and the like. Having all this information at your fingertips will help reduce your stress level and enhance your chances of getting the mortgage loan you need.

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