FHA Loans: What They Are and What’s Changing

If you are purchasing your first home or considering a refinancing of your current home mortgage, an FHA loan may be the best type of home loan for you. It offers some unique features that other home loans do not. There are, however, a few changes coming that should be noted by those who are considering this type of loan.

What is an FHA Loan?

An FHA loan is a home loan that is insured by the U.S. Federal Housing Administration. The goal of this loan is to help potential homeowners who are purchasing a home for the first time or another set of unique circumstances, such as a lower income.
FHA loans are not just for those purchasing a new home, however. They can also be used for certain repairs on your home. In fact, the cost of acquisition and the cost of repairs can all be compiled into one FHA loan.

Eligibility requirements

FHA loans are one of the easiest types of home mortgage loan for which to qualify. The FHA guidelines for loan qualifications are extremely flexible. There are a few basic FHA loan qualification guidelines that you need to keep in mind if you are considering applying for one of these types of loans.

• Two years of consistent employment
• Last two years of income should be the same or rising.
• If you’ve had a bankruptcy, it should be at least 2 years old and with excellent credit since filing
• Foreclosure should be at least 3 years old with perfect credit since filing
• Your new mortgage payment should be approximately 30% of your gross income and your total debt ratio should not exceed 45% of your gross income

How Does an FHA Loan Work?

An FHA loan guarantees a payment to the lenders if the borrower defaults on the loan. To provide the funds for this type of loan, the FHA charges the borrower a fee. Home buyers who use FHA loans pay an upfront mortgage insurance premium (MIP). In addition, the borrower also pays a regular monthly mortgage insurance fee with each payment.

Advantages of FHA Loans

• In a purchase transaction, most closing costs, prepaids & escrow fees included in the loan can be paid by the seller
• Certain borrowers who do not qualify for a conventional loan will qualify for an FHA loan
• Available for refinance of fixed and adjustable-rate mortgages
• Easier to use gifts for down payment and closing costs

Coming Changes in FHA Loans

Although FHA loans will still be an excellent option for many home buyers, the federal government is making some changes to this unique loan. Here are a few things you can expect to see that differ from previous FHA loans:

• Many lenders have increased their minimum credit score of 620, now requiring a minimum 640 credit score. FHA has lower credit score limits but lenders have implemented stricter guidelines
• Upfront Mortgage Insurance Premiums (MIPs) will decrease from 2.25% to 1%
• Monthly Mortgage Insurance Premiums (MIPs) will increase from a .55% factor to .9% factor depending on down payment and loan program

The new FHA loan rules will decrease closing costs but may increase your monthly payment. This amount may be about $30 to $50 extra a month. The decreasing upfront premiums may offset some of the increased monthly payment amounts, however.

A FHA loan is a perfect solution for many home buyers, particularly first time home buyers. They offer much more lenient rules for home loans than traditional home loans. There are a few changes that the federal government is making that should be noted. Only time will tell the impact of these rule changes. Most likely, this type of loan will still be an excellent choice for the consumer.

Debt Do’s and Don’ts

With the economic woes of recent days, it’s nearly impossible for many consumers to live completely debt free. There are, however, different types of debt. Some will benefit you in the long term, while others will do nothing but harm you for years to come.

The average U.S. household with at least one credit card carries nearly a $10,700 balance, according to CardWeb.com. This leaves the question of whether debt is a good or bad. The answer is it depends.

Good Debt

There are times when a debt can actually be a good thing. Good debt improves your life in the long run. While bad debts can improve your life only for a short time, good debt can actually improve it for years to come.

Example of good debt:

* Your home. The key to a home being a good debt is that it is a home you can actually afford. In many cases this simply isn’t the case. When you can afford the monthly mortgage payments, taxes, insurance, and other fees that go along with owning a home, an affordable home is a good investment.

* Education. The value of a college education cannot be stressed enough. This investment will pay for itself tenfold. Accruing debt to get an education is worth it. This investment will pay for itself over time and, if you manage your money properly, will permit you to pay back the debt rather quickly.

* Rental or investment real estate. Real estate has always been a sound investment and probably always will be. If you wisely purchase real estate and charge more in rent than your payments are, your investment will paid back quickly and you will then reap a profit.

* A car. Some mistakenly believe since a car depreciates quickly in value that it’s not a sound investment. This simply is not true. Cars are essential in our society today and can be a wise investment, provided you purchase a car you can easily afford. Owning a car allows for you to get a job, go to school, and do other things that permit you to make more money than the car’s lost value.

Bad Debt

While there are some debts that are not a bad idea, there is a type of debt that can leave you strapped for cash and financially devastated in the long term. These types of debt leave you little or no return of your investment in the future. In simple terms, a bad debt is anything you consume or loses value over time.

Some examples of bad debt include:

* Vacation. While a vacation is certainly nice for refreshment, it does nothing for you in the coming years. It is not wise to go into debt for something that is really more of a luxury than a necessity. Vacations, particularly costly ones, are appropriate for those who can afford to pay for them immediately.

* Food. Eating is a vital component of life, however, it is not wise to accrue debt for. The simple reason is that food is immediately consumed and offers nothing for you or your money in the future.

*Toys. Items used for play are not just for kids! Anything purchased for sheer amusement is not a wise purchase to go into debt for. These items offer no long term value and can cause problems in the long run. This includes items like TV’s and video games. Not only do these items not accumulate value, they also frequently lead to even more entertainment purchases. For example, a new video game player requires video games.

Debt is a common phenomenon in society today. In fact, in many cases it’s inevitable. There are some things that offer a long term investment and return on your money that make them a much better debt option. Items that lose value and don’t offer any potential return on your money simply are debts that should be avoided.