FHA new construction loans are a great solution for many prospective new home owners. There are several advantages to this type of loan that are unequaled among other loans. They can be second chance loans for people who have poor or fair credit, have been foreclosed on, or have been through bankruptcy. FHA also offers a good plan for people who have saved little or no money.
Actually the word ‘loan’ is a bit of a misnomer. FHA is actually a type of loan insurance available through the government agency known as the Federal Housing Authority. If a home owner defaults on a FHA insured loan, the government reimburses the lending institution for the amount still owed. The lending institution lends the money at no risk to them, therefore only the FHA regulations are an issue, not the bank’s normal policies for lending.
Low down payment: For most FHA loans only 3.5% of the cost of the house is required as a down payment, compared with 30% for most home loans. If credit scores are especially low, between 500 and 579, a 10% down payment may be required.
Down Payment from Gift: Most loans will not accept a down payment from the home owner’s parents, or other relatives given as a gift. They require that the down payment come from the future home owner’s own savings. FHA loans will accept if all or part of the down payment comes from an outside source, such as a gift from friends, or family.
Easy Acceptance: FHA loans do not require a perfect credit history, or a glowing financial report. The rules are written for less than perfect economic conditions. Their lending practices are very lenient.
Steady Employment: Must have worked at least two years for the same employer.
Citizenship Requirements: Must have a valid Social Security number. Lawful resident, and be of legal age to sign a mortgage in the state of residence.
Property Appraisal: Home must be appraised by a FHA approved appraiser.
Monthly Debt: The total monthly debt of the home owners cannot exceed 43% of income. This is more lenient than most lending institutions, however of course it is still best to pay off most of those other obligations before committing to a house payment.
Previous Bankruptcy: It must have been at least two years since the home buyer got out of bankruptcy with good credit since.
Previous Foreclosure: It must have been at least three years since the prospective home owner’s last foreclosure, and they must have good credit now.
Payments cannot exceed 29% of income: Most lending institutions will lend up to 35% and some even 45% of the borrower’s annual income. FHA loans are created for people who are at risk of financial problems, and therefore protect the borrower from over extending themselves, by only asking for 29% of income.
Everything has a downside, and with FHA loans, there is a price tag involved. There is a $3000 charge up front for an FHA loan. These sorts of costs are not uncommon in loans, and many loans ask for points, and other extra costs up front. The good thing about this $3000 up front charge is that it can simply be added to the mortgage amount if necessary. In addition a monthly fee is required and that fee is added to the payment. This amount is based on the amount of the loan and it equal to 0.85% or 0.90% of the loan annually. For example on a $300K loan, the monthly premium would be $225 per month. Still FHA loans often offer lower interest rates than other types of loans, so your total payment might still be lower.
FHA Loans give ordinary average income people the opportunity for home ownership. In a perfect world we would all have impeccable credit, because we’d each have a million dollars in the bank to pay for everything with. In the real world sometime bad financial situations happen to good, hardworking people. Despite the myth that low credit scores, bankruptcy, foreclosure and no savings are symptomatic of poor management or irresponsibility that is not always the case. The federal government has always recognized the right to home ownership, and dedicated themselves to facilitating home ownership for people who are, through no fault of their own, at risk for bankruptcy or foreclosure. FHA new construction loans are the best chance ordinary median income people have for owning a home.