Thursday, November 17, 2011

FHA Loan Misconception: Only applicable to first time buyers.

Many first time home buyers would have no problem paying mortgage payments, and could keep up the maintenance and taxes on a home.

The biggest problem facing them is having enough money to make a down payment.  There are governmental agencies and organizations that are aware of this, and are willing to help in time of need.  This article will discuss these organizations and how they can benefit the first time home buyer.

Some background information is called for here.
Down payment assistance programs are a way for home buyers to be able to get into their prospective home without a large down payment.  The seller of the home will assist the buyer with closing costs through giving a portion of their proceeds from the sale to the buyer at closing time. Because the seller is not allowed to give the buyer down payment funds, gift assistance programs provide a work around for the sale to happen, staying within HUD law guidelines.
The amount of this "gift" is determined by the type of loan that the buyer is applying for.

What happens here is the seller enrolls their home in a suitable down payment assistance program, and then contributes to that program in a like amount of what the buyer needs for closing.  There is generally a small fee for this.  At closing time, the organization will then wire the necessary funds to the closing agent.  The seller is to have no part in this transfer of funds.

Probably the best source of this type of funding comes through the Federal Housing Assistance (FHA) program.  In 1965, the Department of Housing and Urban Development (HUD) was formed.  Within this department is the FHA.  The FHA's prime responsibility is administering government home loan programs.  First time home buyers that otherwise might not be able to close on a home can apply for an FHA loan.  The lender is protected, because the FHA insures these loans.

Another big advantage of an FHA loan is credit criteria for the first time buyer.  Typically, the debt to income ratio is 28/36%.  With the FHA, this ratio is set at their standard of 29/41%, giving the first time buyer much more leeway in making the loan.

A common misconception about the FHA is that people think the loan is only applicable to first time buyers.  This is not the case.  There is no limitation on the number of loans you can obtain through the FHA.  The single most prominent disadvantage of the FHA program is the FHA limits loan size.  Because this varies from state to state, a keyword search using the keyword phrase "fha guidelines" will lead you to the appropriate information on FHA rulings.

It is noteworthy to know that HUD does not approve "gift" programs that are managed by charitable organizations.  Mortgage lenders are held responsible to insure that these organizations meet HUD guidelines as listed in the HUD Handbook 4155.1 REV-4, CHG-1 Paragraph 2-10(C).  If attempting a loan through any charitable organization, the responsibility lies with the lender to insure these guidelines are met. 
There are also other down payment assistance programs available today.  A search of the internet reveals that The Nehemiah Program, AmeriDream Inc. and Partners In Charity are the most prominent today. To be sure that you are dealing with an above board organization, insure that the organization in question is a member of the Home Gift Providers Association (HGPA).

The HGPA has a set list of guidelines for best practice and code of ethics. 

When dealing with down payment assistance programs, be prepared to ask questions to help you determine if they are on the up and up.  Ask for such things as a current financial stability record.  Ask them if they are active in the community, with partnerships with businesses and organizations.  Does the organization allow borrowers to use the down payment gifts to pay off bad debt, or settle liens or judgments?

If they do, then be aware that the HGPA does not approve of this method.  Try your best to determine if the organization gives kickbacks to realtors, mortgage lenders, or anyone involved with the transaction.  This is a sure sign of shady practices, and it is best to shy away from these programs.

Be aware that the buyer may inflate the price of the home you are interested in to cover the money gifted to the organization you are dealing with.  A worthy real estate agent will tell you if the home is priced realistically.

Following these simple guidelines can put you on the road to success if you are struggling with a down payment on a home.  Always do your own due diligence, and the results will be much more in your favor.

The views, opinions, positions or strategies expressed by the authors and those providing comments or external internet links are theirs alone, and do not necessarily reflect the views, opinions, positions or strategies of First Capital, we make no representations as to accuracy, completeness, current, suitability, or validity of this information and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. All registered trademarks, copyright, images, or other items used are property of their respective owner and are used for editorial purposes only.

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