While mortgages offer numerous benefits, they are also risky to both borrowers as well as the lenders. The lenders take the risk of not getting repaid fully when they lend money. On the other hand, as a borrower, you can end up losing your money or even your home, if you happen to default on your mortgage.
No borrower can take an FHA mortgage to buy a vacation home. It is not available for “recreational use” purchases. However, it can be availed if you are buying a second home to use it as your secondary residence.
So, what exactly is a secondary residence?
The 28/36 rule informs the lender of the borrower’s capacity to afford the monthly mortgage payments, considering various factors such as his monthly income, his housing-related expenses as well as his other debt payments. As per this rule, the borrower should ideally spend less than 28% of his gross monthly income on his total housing expenses. If he has other debts to pay up such as car loans, personal loans and credit card payments, the total amount that he pays per month should be well within 36% of his gross monthly income.
28% – The Front-end Ratio
This applies to the housing expenses, which are summarized in general as PITI – the monthly Principal, the Interest, the property Taxes and the home Insurance Payments. While this may include condo or association fees, it does not include payments towards cable TV and utility bills.
For instance, if you are paying up $1,000 as monthly Principal and interest, an additional $200 for home insurance and property taxes, your PITI costs would come up to $1,200 per month. If you need to qualify for the front-end ratio, your gross monthly income should be at least $4,286 ($1,200 / 0.28).
36% – The Back-end ratio
To get your back end ratio you will have to sum up all your recurring monthly payments on debt along with your PITI and divide the total amount by your gross monthly income. Apart from PITI, the back-end ratio covers all expenses such as condo fees / association dues, credit card payments and payments on various debts such as personal loans, student loans, car loans etc. If you are a divorcee, it may even include your alimony payments or the amount that you pay as your monthly child support.
For instance, apart from the $1,200 in your PITI payments, you may also have a $150 monthly car loan payment and a $200 personal loan payment. In this case your back-end monthly debt payments would amount to $1,550. Your gross monthly income of $4,286 (which we calculated above) would no longer be sufficient to qualify for the 28/36 ratio. It needs to be at least $4,306 ($1,550/0.36).
One thing you need to remember in the back-end ratio is that you have to consider only those monthly payments which you are going to be paying up for at least the next 10 months. For instance, if you have a car loan, the monthly payments of which are due only for the next 9 months, it should be excluded from the back-end ratio. Therefore, it is always better to pay off your other loans before going for a mortgage.
Rule for FHA mortgages
The 28/36 rule applies for conventional mortgages. For FHA mortgages the rule that applies would be 31/43. However, this could be further relaxed in certain specific scenarios. For instance, by making your home energy efficient, you could qualify for the 33/45 rule if you are going for an FHA mortgage.
You may get contacted by a few lenders who may have bought your details via mortgage leads or FHA mortgage leads. These lenders may even be willing to be flexible on the 28/36 or the 31/43 rule. You may think this is beneficial for you; but in the long run it could be very risky. Over time you may find it difficult to afford your monthly payments, which might even take you towards losing your dream home to a foreclosure. However, if you qualify for the 28/36 (or the 31/43 in case of FHA mortgage) rule, you will have no problems repaying your loan.
How to qualify for the 28/36 Rule?
There are three ways by which you can qualify for the 28/36 rule and make sure you get a good mortgage on the best of terms.
Unlike people belonging to the other generations, the millennials have well-paying jobs. Yet, they do have to pay back their debts.
20 or 10% down payment is not something the millennials can afford as they have no assets. However, they are wise enough not to let their monthly housing payments go into a third person’s account. They are always looking for easier options to buy their own homes as quickly as possible and FHA is definitely one such option.
FHA approved loans offer many benefits that the other types of mortgages don’t.
Low Down Payment
The minimum down payment that you may have to make in case of an FHA loan is 3.5%. When compared to the 10% that conventional mortgages ask for, 3.5% is truly a bargain. Of course, there are programs that may require down payments lesser than 3.5%; but not everyone may be eligible to apply for such loans.
Easy to Qualify
FHA loans are easier to qualify for. They don’t have strict restrictions like VA loans, Department of Agriculture Loans or Income cut-offs. Even the credit score that FHA lenders accept is much lower when compared to the other kinds of loans.
You can easily obtain an FHA loan even if your credit score is below 600 while most other loans ask for a FICO score that is above 720. The guarantee given by the Federal Housing Administration to set off the losses of the lenders gives them the confidence that they need, to approve FHA loans despite low credit scores. With most millennials having middling credit scores, FHA loan seems to be the best option.
Flexible Debt-to-Income Ratio
The Debt-to-Income Ratio is often the deciding factor for the lenders to approve mortgages. Most lenders may not approve your loan if your debt-to-income ratio is higher than 45%. However, FHA-approved lenders are quite flexible when it comes to the DTI ratio. They even stretch up to 56 percent if you have a strong income that leaves adequate amount of residual income after paying off all your debts.
As mentioned above, income is not a problem for millennials as most of them have well-paying jobs. With their debts always on the rise, FHA seems to be their best option while buying a home.
There is just one drawback in case of FHA loans. The FHA premiums can never be cancelled. Nevertheless, this fact does not pose a problem to millennials as they don’t keep their starter homes for too long.
It becomes very easy for millennials to look for FHA approved lenders. In fact most such lenders purchase the details of potential FHA loan borrowers through FHA mortgage leads and get in touch with millennials directly. All that the borrowers then have to do is, shortlist a few lenders, compare their rates and terms and decide on the right lender to borrow their FHA loan from.
Contact Heritusleadtransfer for
FHA Mortgage Leads
Are you worried about your less-than-perfect credit?
Would you purchase a home if the monthly mortgage payments are minimal?
Then an FHA loan could well be your answer.
You can consider going for an FHA loan whether you want to buy a home or refinance your existing mortgage.
The best part about FHA loans is the low closing costs. Also, they are easy to qualify for even if you have less-than-perfect credit, as the HUD reimburses the FHA-approved lenders when the loan goes bad. This is exactly why there are so many FHA-approved lenders who are ready to offer FHA loans to many borrowers, despite less-than-perfect credit and low monthly income. In fact some of them may even have contacted you through FHA mortgage leads.
You can finance your FHA loan even if your loan amount is less than the allowable Loan to Value (LTV)ratio. Here are a few such ways:
While Refinancing Your FHA Loan:
- You can pay off your previous loan by taking a new FHA loan. You can also pay off your closing costs up to the allowed LTV. For instance, if the maximum loan for your refinancing is $200000 and if your previous loan’s payoff is $195000,(which is 96.5 percent of your home’s value (LTV)),then you can finance your closing costs up to $5000.
- You can reduce the amount of your FHA loan if it is necessary to meet the LTV limit.In order to do this, you can either pay a part of your closing costs or ask your lender to reduce the fee. You can also ask third party service providers such as escrow and title agents, to lower their fees
- You can go for no-cost refinance by requesting your FHA lender. The lender will cover the closing costs (incurred) through a yield spread premium instead of financing directly into the loan. Because the lender provides a higher interest in exchange for the payment of closing costs on your behalf,you are indirectly financing the costs.
While purchasing a new home:
- The property seller can be asked to cover your closing costs. The FHA allows a concession of 3 percent towards a buyer’s recurring as well as non-recurring closing costs, including third party service fees, points and lenders fees.
- You can include the 3% seller concession and make it reflect on the counter-offer form or contract addendum.You can also negotiate the seller-paid closing costs as a percentage of the sales price or as a dollar amount.
- You can request an amount that is either equal to or less than the closing costs that you have estimated. In fact you could even ask your FHA lender to give you an estimate with good faith, so that you know how much to ask for. If there is a surplus of the seller-paid concessions, you can use the same to reduce your FHA loan balance. FHA restricts cash back from seller paid closing costs.
There are many more ways that might come to light if you do a bit of research. Decide on the one you want to adopt before you say yes to the FHA lender who contacts by purchasing
FHA mortgage leads
FHA requires lesser down payment than a conventional one
While most conventional mortgage lenders ask for a 20% down payment, the minimum amount you will have to put down is at least 5% of the home value. When compared to this an FHA mortgage requires only 3.5% down payment. This makes FHA loans very popular among first-time home buyers.
With the FHA recently reducing the monthly mortgage insurance by 60%, there has been a definite increase in the popularity of FHA loans across the USA. Many FHA-approved lenders have started contacting potential borrowers by purchasing
FHA mortgage leads
Here is some -information that can improve your knowledge on FHA loans:
There are three types of FHA loans
FHA loan programs are of three types:
- FHA 203(b) fixed-rate mortgage (for 15 or 30 years):These are single-family FHA insured mortgage loans that can be used to buy a new or refinance an existing family home (1 to 4 members) in a rural or an urban area.
- FHA 251 adjustable-rate mortgage:These loan programs insure home purchases or the loan refinances, where the interest rates of the loans keep fluctuating.
- FHA 2-1 buy-down loans:In this type of loan you can get the interest rates of the first three years of your mortgage lowered, by paying up an upfront fee.
Eligibility Criteria for FHA Mortgages
In order to qualify for an FHA loan, you need to:
- Have a positive credit history for at least two years in a row
- Show increasing or at least consistent income
- Have an employment record that is steady and you should have worked with the same employer for at least two years.
- Have absolutely no bankruptcies in the past two years
- Keep your mortgage payment at about 30% of your gross income or lesser
FHA insures; but doesn’t lend
The Federal Housing Administration is not into originating mortgages. It only insures the loans that are offered by the banks, mortgage companies and private lenders who are FHA approved and protects their interests in case the borrowers default. By reducing the risks of the lenders, FHA makes sure the borrowers obtain loans that involve lower down payments.
FHA Interest rates can vary
FHA interest rates are not established by the government. They vary from one lender to the other. The interest rates of FHA loans are usually higher than that of the conventional loans. In case you have any problems with your credit your interest rates would be a lot higher.
FHA loans don’t require home inspection
You can get an FHA loan without a home inspection. However, you will still need a home appraisal. Appraisals may allow minor property defects that are caused through the usual wear and tear. These include leaky faucets or missing handrails. In case you want to conduct a home inspection by your own will, make sure the house meets the building codes that are nationally recognized. Any violations will have to be addressed before closing.
FHA loans come with a maximum limit
You can get a maximum loan of $636,150 if you are going for a single family unit. The FHA loan limit depends on the location of the house that you are going to purchase. In return you only have to make a 3.5% down payment. Nevertheless, if you are purchasing a home with a really high value, you may be better off looking for alternate options.
FHA loans are not ordinary loans. They are insured by the government and backed by the FHA or the
Federal Housing Authority.
To run a search on the HUD website, enter your city name and your state and then click on the search button. This should give you the names of all
FHA mortgage lenders