But what about a home that is run down and in need of extensive repair? These homes
are not worth nearly what they would be if they were in good condition. And you can’t
make repairs on a home that you don’t own. The FHA has a solution for this situation.
It’s called the FHA 203k program. The program allows for up to $35,000 in repairs or
upgrades.

A typical example of how this program is used is called a “handyman’s special”. The
home has to meet certain eligibility requirements. It has to be a 1 to 4 unit property for
example. As long as the local zoning in place, converting a single unit proper to multiple
units or vise versa is acceptable. It is a very flexible and far reaching program for all
types of rehabilitation and upgrade situations.

The FHA 203k loan is a single loan that covers the cost of the property and its repairs.
There is no need for a high interest construction loan and then refinancing to consolidate.
A homeowner can expect a loan amount based on the expected home value once repairs
or upgrades have been made.

The primary use of the program has been and still is the redevelopment of run down
buildings. But there are certain limitations. The funds are intended to cover the costs
repairing the interior of the building. Roof and siding for example are not covered. If
you make the needed repairs yourself, you can not receive payment for your labor, just
the cost of materials used.

To apply for an FHA 203k loan you will need to apply with an FHA approved lender.
You will need to prepare a detailed cost analysis of the work that needs to be done as
have an appraisal done to determine what the home will be worth after the upgrades have
been completed.

Once you have closed on the loan and are ready to start the rehabilitation process, the
money for improvements has already been set aside in an escrow account and is ready
to be drawn on. In some cases where the home is not in livable condition, you can
escrow up to 6 months of mortgage payments to get you through the renovation process.

Overall, the FHA 203k is an extremely helpful program for run down homes and
neighborhoods. It provides for homeowners to make needed repairs without going
through several loan approval processes and refinancing high interest rate construction
loans. If the home you want to buy is a fixer upper you will most likely find that the
FHA 203k loan is the best loan program out there for you.

First, there is an important distinction between an appraisal and an inspection. An
appraisal is required by the lender to make sure the home is a good investment. This
does not guarantee the home is in good condition nor should it be assumed that no repairs
are needed simply because it passed an FHA appraisal. A passing appraisal is definitely
a good sign, but you should have an inspection done to determine what if any changes
should be made to the property. Your personal requirements may not be the same as your
lenders requirements.

There are several conditions that should be taken care of before an FHA appraisal is
scheduled. The appraisal will evaluate the homes potential value, the soundness of the
plumbing, electrical system etc. If there are known issues that will need to be addressed
it is best to take care of the first to avoid a second appraisal being required to ensure the
work was completed correctly.

Just a few of the most common repairs needed are:

• Any faulty wiring will need to be brought up to standard.
• Cracks in the foundation will need to be repaired.
• There can be no chipped or peeling paint.
• Caulk around all the windows and make sure they all open/close correctly.

An FHA approved inspector will have to do the appraisal. Not all appraisers are
certified to do FHA appraisals. You can use the search tool here to look up an approved
appraiser in your area: http://www.forfha.com/appraisers

If you will be scheduling an appraiser, there are some important things you will want to
know before making your selection. Their experience in the field, how much they charge
and how long will it take for them to get the results back to you are just a few of the
questions you will want answered.

The cost of an appraisal varies by area but they generally range from $300 to $500.
In most cases, an appraiser will take under an hour to perform his inspection and will
take two or three days to process the information and prepare the appraisal report.

The FHA is part of the Department of Housing and Urban Development. There is
extensive information on HUD’s website about conditions and property requirements
that you may find useful. Here is a link to FHA’s minimum property standards: http://
www.hud.gov/offices/adm/hudclips/handbooks/hsgh/4910.1/index.cfm
Don’t forget, an appraisal is required for the sale and refinance of a property and is
primarily done to protect the banks investment in the property. An inspection is a separate and distinct review of the property done for your personal best interests. If you are buying a property, have an inspection done to make sure the property meets your
personal requirements and is satisfactory to you. If you are selling your home and need
an FHA appraisal done, the link and information above will help make sure all goes smoothly for you.

Finding the right home is itself a daunting task for many. What size, price range, what
about schools in the area, etc? There are a few basic steps that will help you through the
process:

• Look at your financial picture and determine how much of a loan you can
  afford. This will prevent you from looking at homes that are out of your price
  range. Use this calculator to determine how much you can afford to pay:
  http://www.ginniemae.gov/2_prequal/intro_questions.asp?subTitle=YPTH.
  Once you have an estimate of how much home you can afford, you can start
  researching available homes in your area.
• Determine how much of a down payment you have saved and are able to
  put toward the property. See below for more information on down payment
  requirements.
• Narrow your search to homes within your budget. There is a simple one page
  checklist you can use: http://www.hud.gov/buying/checklist.pdf. Make copies
  and it with you when you are looking at potential homes. The checklist will
  give you a lot of different features to look for, many of which may not be on
  the top of your mind as you’re shopping unless you have a reference like this
  handy.

Most first time home buyers do not have a large amount of money saved and are not
able to make a 10% or 20% down payment. The FHA has a program that is ideal for the
majority of first time buyers who simply do not have the resources to put toward their
home.

Take an average $200,000 home as an example. To purchase this home you will need
to consider several factors, not the least of which is how much can you afford to pay for
your home? Your housing payment will be made up of four parts: principal, interest, real
estate taxes and home owner’s insurance.

How much of a down payment do you have? If you choose a Conventional mortgage,
on a $200,000 home you can expect to put down at least $20,000 to $40,000 in addition
to closing costs. Compare that to an FHA loan requirement of 3.5% plus closing costs.

Assuming closing costs run around 4% of the loan amount, the total you would have to
come up on each of these two loans would be:

• Conventional at 20% down plus 4% closing costs: $48,000
• FHA loan at 3.5% down plus 4% closing costs: $15,000

Again, for most first time home buyers these days, a Conventional loan is simply not an
option. The costs associated with the down payment and closing costs are simply beyond
their ability to handle.

Once you have done your homework and are ready to make an offer on a property, you
will be required to supply some basic information with your application. Typically, a
lender will want to see your last two years W2s, your most recent pay stubs and they’ll
need to run a credit report to look at your credit history.

A FHA Streamline loan is a loan program for homeowners who already have a FHA
loan and want to reduce their payment. The “streamline” aspect of the loan refers to
the reduced paperwork used for qualification for the loan. The idea behind the loan is
to simplify the refinance process. For example, because you already have a FHA loan
and you are making your payments on time, there is no need to establish your credit
worthiness.

As a general description, most people will find that these are the basic requirements of a
Streamline loan are:

• The home being refinanced must be your primary residence.
• You must have a FHA loan now and it must be current. All payments
  have to be paid on time for at least one full year.
• Your new loan amount can not be higher than your existing loan amount
  without a new appraisal done. If your new loan amount will be lower than the
  old, there is no appraisal requirement.

Some rare situations may exist outside of this such as refinancing an investment property
but those are relatively rare in the FHA world. The above applies to most homeowners
looking to refinance.

You will notice that income and credit are not listed on the basic requirements. This
is one of the main advantages of the streamline process. In today’s market, many
homeowners are looking for ways to reduce expenses because of temporary cut backs at
their job or for various other reasons.

A streamline loan may not be appropriate for you for any number of reasons. If you are
trying to avoid foreclosure you would not qualify due to a negative payment history. In
this case, you would want to look at the HOPE for home owners program, often referred
to as a loan modification agreement.

You can not take out cash with this streamline loan. Paying off credit cards or
consolidating debt would have to be done by a standard FHA or Conventional loan. You
will want to take a look at your overall financial picture and evaluate whether or not you
would benefit by consolidating other debts.

For those who took out their mortgage a few years ago and are paying a much higher
interest rate than would be available to them now, this is certainly a very good option to
explore. Sub prime loans or bad credit loans come with an inflated interest rate. After
several years a homeowner should have sufficient equity to refinance into a lower interest
rate with a lower principal and interest payment.

FHA Streamline loans are only available through FHA approved lenders. Your current
bank may or may not be able to assist you. HUD has setup a database of lenders you can
search online. Visit the site at www.hud.gov/ll/code/llslcrit.cfm and either search for
your lender or use the selection criteria to locate a lender in your area.

Your options will depend on your goals. As with most other mortgage programs you will
most likely (depending on credit, income and equity in the home) have the option to take
cash out to pay off debt or spend as you please. Taking cash out is a convenient way to
pay off high interest debt and reduce your monthly obligations. Analyze your existing
debt and consider your repayment rate. Currently, you can expect to pay slightly over
$5.00 per thousand borrowed on your mortgage. In many cases you may be paying over
$20.00 a month per thousand on high interest credit cards.

Refinancing with cash out on an FHA loan will allow you up to 85% loan to value ratio.
Not only would you have a lower rate than before, you would also have fewer monthly
payments to make and an improved cash flow situation.

But you may have no need for extra cash on hand or for paying off credit card debt. If
your goal is simply to refinance your current mortgage in order to get a better interest
rate, you’re looking for what is called a “rate and term” refinance. The advantage of
a rate and term is a lower rate with a lower monthly payment. You should pay careful
attention to your current situation and compare the new loan to the existing loan.
While your rate and payment will most likely reduce, you will be resetting the clock
on your mortgage. If you have made payments over the last 5 years then you have 25
years to go on your current mortgage. Refinancing at 30 years for a lower rate will
stat the clock again. Your overall savings and benefit should outweigh this term reset.

The third option you will have is called an “FHA Streamline”. This is only available if
you already have an FHA loan. The “streamline” refers to the amount of documentation
that goes into the loan application and approval process. Many people have confused the
meaning of this term and assume that the Streamline process is a “no cost loan”. This no
cost option is offered by certain lenders but it is not relevant to the Streamline loan itself.
The lender offers a higher interest rate than you would otherwise receive in order to cover
the costs of the refinance.

To qualify for a Streamline loan there are several guidelines that must be met:

• You must already have an FHA loan and you must refinance into a new FHA
  loan. This program does not apply to conventional loans.
• Your loan must be current.
• The Streamlined loan must result in a lower monthly principal and interest
  payment than the loan being refinanced.

In situations where your primary goal is to reduce your monthly mortgage payment, the
Streamline option is an obvious good choice to consider. But don’t forget to weigh the
reduction in payment with the new 30 year term. In many cases, you will find that the
savings greatly outweighs the new time commitment.

There are three major credit bureaus: Transunion, Experian, and Equifax. Your credit
report may differ by credit bureau, so it is not uncommon for you to have three different
credit scores. The high and low scores are ignored, and the middle score is used for
qualification purposes. For example, assume your scores are 680, 700 and 720. In this
instance, 700 would be the score used for qualification purposes.

Your score matters to lenders because based on experience and analysis, the lower the
score the higher risk of non-payment. Some may say that this is not always the case and
they’re right, but there is no way to quantify this mindset on an application. So your
credit score is the key factor used in determining your risk to a lender.

In years past, there was no minimum credit score requirement for Federal Housing
Authority (FHA) loans. However, that has changed and now the minimum score is 620.
Further, the lower your score, the higher the rate you can expect and vice versa. If your
score is lower than 620, you will need to work on improving your credit to get it above
the minimum threshold before applying for a FHA loan. By working to improve your
credit score, you may be able to save more in the long run in decreased interest costs.

Because lenders offer interest rates based on credit risk factors, anyone considering a
FHA loan should take a good look at their credit report and improve their score as much
as possible before submitting an application. With a good credit score of approximately
700, you can expect a moderate rate based on the current market rates. But if you
could improve your score by paying your bills on time or perhaps paying down the
balances, the lower rate you receive would mean lower monthly payment and savings
in the long run. For example, take an average sized loan of $250,000 and assume a
0.5% reduction in your rate, you could potentially save $30,000 over the life of the loan.

For the sake of example, let’s say you find a home that meets your family’s needs. The
location is right, the features are right, and you have negotiated a purchase price of
$200,000. Now you need to get a home loan to pay for the property. A bank gives you
two options, Conventional and FHA mortgage, and you need to decide which one fits
your needs.

The first option is a Conventional mortgage at 5.25% fixed rate for 30 years. This option
comes with a hefty down payment requirement of 20%, which come to $40,000 in this
case. The second choice is a FHA mortgage at 5% fixed rate for 30 years. You will only
need to put 3.5% down or $7,000 in this case. However, there is a 2.25% funding fee
and .5% monthly mortgage insurance that were not included on the Conventional loan
option.

These two loans have some key differences. Do you have $40,000 plus closing costs
to put down on this home? If not, then the Conventional mortgage may not be a viable
option for you. While the FHA loan has a higher price tag and an additional fee upfront
and monthly, it does have a slightly lower interest rate, which helps offset the extra
expense. You need to use a calculator to figure out the costs versus savings to know
exactly what you’re getting. There are online mortgage calculators that make this process
easy. Your credit rating and debt to income ratio are factors in being approved for a loan
of any kind.

In many cases, an FHA loan may be the only option a home buyer can qualify for. In fact,
more FHA loans are being issued now than ever before. The economy has experienced
a downturn, the mortgage crisis occurred, and many people simply do not have the
resources to save a large down payment. A blemished credit history is another problem
that has caused many people to turn to FHA for help.

But, FHA loans are not just for the “tougher cases” or first time buyers. You may
feel your money is better left in the bank than putting it down on your new home, or
perhaps you are refinancing and you want to take out more equity in your home than
Conventional loan limits will allow. Paying off debts with your home equity could save
you quite a bit on your monthly expenses and a slightly higher mortgage payment may be
worth it to you.

It is a mortgage that is insured by the FHA, and, not a loan that is issued by or serviced
by the federal government. The government is not giving you the loan. A FHA loan
provides the bank with additional security that the loan will be repaid. Only FHA
approved banks can provide the loans.

There are additional fees associated with FHA loans that do not apply to Conventional
Mortgages; these additional fees are assessed on every FHA loan and cannot be waived.
In order to fund the program, each customer pays an upfront funding fee called Upfront
Mortgage Insurance Premium. The current cost of this is 2.25% of the loan amount.
Additionally, there is a 0.5% annual charge paid as a monthly Mortgage Insurance. The
monthly Mortgage Insurance must be paid for a minimum of five years. After the five
year term, the monthly premium can be dropped if the loan to value ratio has reached
78% or better.

So, if there are additional fees on an FHA loan why would anyone ever want one? Good
question!

First, FHA loans are more forgiving when it comes to a blemished credit history. The
minimum credit score for an FHA loan is 620. As long as your payments are current and
your score is equal to or greater than the minimum required, your credit should pass.

Next, your debt to income ratio matters. This is how much debt you have versus how
much money you make. There are two calculations used: Front End ratio and Back
End ratio. The front end ratio is your housing payment. This includes the mortgage
principal and interest as well as taxes and insurance, commonly referred to as PITI. On a
Conventional mortgage, your front end ratio should be under 28% of your gross income.
With an FHA mortgage, you front end can be higher, around 29%. The back end ratio
is calculated using all of your recurring payments including the mortgage (PITI). A
Conventional loan typically limits a home owner’s back end ratio to 36%, while an FHA
loan will accept 41%.

Another important difference between a FHA and Conventional loan is the cash out limit.
Under Conventional loans, you are limited to 80% of your homes value. With FHA, the
limit increases to 85%. The extra 5% can be used to pay off credit cards, student loans or
other debts.

Before you apply for an FHA loan, you should analyze your financial situation to get
a good understanding of what you can afford, what you are willing to pay, and how
you will explain any problems on your credit report. In addition, you will have to
provide your social security number and date of birth so that a full credit analysis can be
performed. Be prepared to provide a written explanation of any late payments that show
up on your report going back over the last two years. To qualify for an FHA loan, get
your bills paid up to date and ensure you’re score is at least 620 before applying.

The loan officer will ask you about your current employment status to determine
your ability to repay a loan. Ideally, you will have been employed at the same
business for at least the past two years; this shows income stability. The loan officer
is going to want to see your last two years W2s as well as your most recent pay stubs.

The next item that will need to be reviewed is the home you are looking to purchase or
refinance. In either case, you will have to qualify for the loan financially in two ways:
with the “front end ratio” and “back end ratio”. Your front end ratio only considers your
mortgage payment. It includes principal, interest, property taxes and home owner’s
insurance. Ideally, your front end ratio will be under 29% of your gross (before taxes)
income. Your backend ratio considers all recurring debts, including the mortgage
payment, and will be the higher of the two ratios. Your backend ratio should be under
41%.

Because FHA loans are more flexible than Conventional loans, these qualification
guidelines are just that. They should be used to gauge what is considered standard and
what you need to do to prepare before you submit a loan application.

In many cases, a home buyer can qualify for a much larger loan amount than they
realize. Keep in mind that just because you qualify does not mean you should take out
a loan of that size. Don’t get yourself in over your head as only you know what you
can comfortably afford. A lender does not look at every aspect of your financial world
so you may have financial commitments that are not considered in the loan approval
process.

Once you have your ducks in a row, do some online research, call your bank and shop
around for the best rate and terms. Good luck!

Today, there are two main types of loans available: Federal Housing Administration (FHA) and
Conventional. In this article, I will focus on FHA loans.

Back in 1934, America was in the midst of the Great Depression. One out of every four people
was unemployed, and most people rented instead of buying a home. Because jobs were sparse
and the economy was in ruin, the number of foreclosures skyrocketed during this time period.
At the time, options to purchase your own home were severely limited and the terms of the
loan made them impractical for most workers. Flexible options for the general public as well as
options for returning veterans and military personnel were not readily able.

The FHA, which is a federal agency located within the Department of Housing and Urban
Development, was established by an act of congress to make homes affordable to a broader
public. It’s main function is to insure residential mortgages.

Many people incorrectly believe that the FHA is set up to be a loan provider like a bank.
However, the FHA does not issue loans to homeowners. Instead, the FHA works with specially
approved banks, who provide loans to qualifying homebuyers. Their role is as an insurer of loans.
The insurance helps reduce the banks’ risk of loss in case the homeowner should default on
the loan. This reduced risk program was and still is extremely successful. In fact, the Federal
Housing Administration (FHA) is the largest home mortgage insurer in the world. It allows much
more flexibility for the bank and the home owner.

Some of the key advantages the FHA insured loan provides the homeowner:

The lower down payment allows first time buyers and anyone who has not been able to save a
large down payment to still be able to get a home loan. On a Conventional mortgage, a home
buyer is usually expected to have at least 20% down payment. With an FHA loan, you can have
as little as 3.5% down. By allowing a higher debt to income ratio, potential buyers can qualify for
loans they would not have been eligible under conventional terms. The higher cash out limit can
help to reduce the homeowners debt load. Many people have used that money to pay off credit
card debt or student loans.

Another common misconception about FHA loans is that they are only available to first time home
buyers. This is not the case. While there are often special incentives for first time buyers, that
does not exclude repeat homeowners from taking advantage of other FHA programs available.

While there are additional fees associated with FHA loans that do not apply to Conventional
loans, you must factor in the advantages and potential savings available under your specific
situation. If you need a flexible loan to buy or refinance your home, FHA is a reliable option to
consider and well suited to meet your needs.