Submitted by Martin Martinez
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Most of us need to borrow some money at least at one point of time in our life. When we want to buy a car, to study at the College or University, when we want to buy a house or home, when we need money to start our own business - even when we use our credit cards.
There are many types of loans and mortgages, such as FHA loans, Student loans, College loans, Business loans, Personal loans, Commercial loans, Payday loans, Auto loans, Car loans, Vehicle loans, Mobile home loans, Motorcycle loans, Military loans, Construction loans, Home loans, house loans, home equity loans, Bridge loans, Disaster loans, farm operating loans, Agriculture loans, Debt consolidation loans, Direct Loans, Government loans, Unsecured loans, refinance/remortgage loans, Bad credit loans, etc., just to name a few.
Within each loan term there are additional sub terms such as Fixed rate vs. Variable rate, Adjustable rate, ARM, PITI, HELOC, Balloon Mortgage, reverse mortgage, and other bewildering financial terms we will try to clarify here.
What is FHA
Home mortgages are important part of the loans universe but we will concentrate here On a specific one called FHA. The Federal Housing Administration (FHA), a wholly owned government corporation, was established under the National Housing Act of 1934 to improve housing standards and conditions. Its goal was to provide an adequate home financing system through insurance of mortgages, and to stabilize the mortgage market.
FHA is not a loan, Its an Insurance! If a home buyer defaults, the lender is paid from the insurance fund. An FHA loan allows you to buy a house with as little as 3% down payment, instead of the higher percentages required to secure many conventional loans. Taking advantage of the FHA loan program is a great way for first time buyers, or anyone with a shortage of down payment funds, to buy a home. It is not a program reserved only for first time home buyers. You can buy your third or fourth home with an FHA loan. The only stipulation is that you may only have one FHA loan at a time.
FHA helps low and moderate-income families purchase homes by keeping the initial costs down. By serving as an umbrella under which lenders have the confidence to extend loans to those who may not meet conventional loan requirements, FHA's mortgage insurance allows individuals to qualify who may have been previously denied for a home loan by conventional underwriting guidelines. It also protects lenders against loan default on mortgages for properties that include manufactured homes, single-family and multifamily properties, and some health-related facilities.
The two very basic terms you need to understand is A.PITI and B. Long Term Debt. PITI stands for Principle, Interest, Taxes, and Insurance. It is with relations to your Mortgage and property housing total monthly cost. Your maximum PITI should not exceed 29% of your gross monthly income.
Long term debt includes such things as car loans and credit cards balances. In order to qualify for FHA loan your PITI + Long Term Debt should not exceed 41% of gross monthly income.
This is much lenient terms compared to conventional loan terms of maximum PITI of 26% - 28% and Total PITI + Long Term Debt of 33% -36%.
Qualifying for an FHA loan you need the following:
- Good credit history that shows you meet your financial obligations.
- PITI + Long Term Debt not to exceed 41% of gross monthly income.
- Sufficient cash down payment at time of closing. 3% of the total cost.
- Closing expenses cost of 2%-3% of the price of the house. (Homeowners Insurance, Attorneys fees, title fees, and title insurance, Private Mortgage Insurance if you are paying less than 20% down, the loan origination fee, and a fee that goes into the FHA insurance fund).
The FHA ARM - Adjustable Rate Mortgages is a HUD -US Department of Housing and Urban Development, mortgage specifically designed for low and moderate-income families who are trying to make the transition into home ownership. At the time it is issued, the ARM usually has an interest rate several percentage points below a fixed rate mortgage.
The interest rate can change as market conditions change. If interest rates go up, so does your mortgage payment. If they come down, your mortgage payment comes down, too.
The reverse mortgage is often of interest to senior homeowners. This loan provides cash for living, health or other expenses. Payments are made to the borrower in a lump sum or monthly. Most reverse mortgages are issued to those 62 and older who own a debt-free home with no tax liens.
A Home Equity Line of Credit (HELOC) lets you use equity in your home to pay for home improvements, debt consolidation or other financial goals. With an acceptable debt, credit and employment history, you may be able to borrow up to 85% of the appraised equity in your home.
Balloon Mortgage - the buyer pays interest for three to five years on a balloon mortgage. After that the entire principal comes due all at once.