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Ten Steps Toward Getting an FHA Mortgage or FHA Refinance Loan

By Richard Barrington
Mortgage Credit Problems Columnist


Despite all the talk about a real estate slump and a financial crisis, this is actually a good time to consider buying a home. After all, as of February 28, 2009, U.S. home prices had declined by an average of nearly 30% over the previous three years. 30-year mortgage rates spent much of early 2009 below 5%, territory they had never reached before.

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With prices and interest rates making housing cheaper, the key challenge is to find a mortgage. By following some easy, common-sense steps, you can obtain an FHA mortgage to take advantage of market conditions by joining the ranks of homeowners.

Background on FHA Mortgages

The FHA insures qualified mortgages from private lenders, giving those lenders to confidence to make loans even to people with short or less-than-perfect credit histories.

At times, there are alternatives like subprime mortgages for people with bad credit, but lenders typically become most reluctant to make these loans when the economy weakens. Even when subprime loans are available, in order to compensate for the risk of lending to someone with bad credit, lenders often charge interest rates that are around 3% higher than FHA rates.

If you have a long and stellar credit history, it would probably be cheaper for you to get a conventional mortgage. However, if that's not the case, an FHA mortgage may be the most readily available and cheapest option.

Steps toward Getting an FHA Mortgage

How should you approach getting an FHA mortgage? The following steps will help you get ready for home ownership, and help demonstrate that you qualify for a mortgage.

  1. Build a steady employment record. Ideally, you should be able to show that you have worked consistently for the past two or three years, and that you have a steady income.
  2. Get on a budget. One way you can make sure you'll be able to meet monthly mortgage payments--and demonstrate to would-be lenders that you can make those payments--is to set and live by a regular budget which leaves room for a mortgage payment.
  3. Identify any credit issues. Know your credit history, and try to clear up any outstanding issues. Having black marks does not mean you won't qualify, but you will need to be able to explain them when you start talking to FHA lenders.
  4. Build a stable history of bill paying. Whatever your credit history has been, once you commit to becoming a home owner you should start building a track record which shows you can meet your obligations consistently.
  5. Identify your target price. Once you're on a budget, your rent plus anything else you can afford to set aside can act as an estimate for how much of a monthly mortgage payment you could afford. In turn, this can be used to calculate a target price for a home. Be aware that FHA loan limits vary from region to region, so you will want to make sure your target price is within the FHA loan limits for your area.
  6. Save for a down payment. FHA mortgages require a down payment equal to 3.5% of the loan amount.
  7. Keep track of real estate listings. Even before you are ready to start serious shopping, follow real estate listings to get a feel for the market.
  8. Find a house in the appropriate price range. Once you have your down payment saved, you can start shopping for a home that fits your budget and applicable FHA loan limits.
  9. Compare FHA lenders. Using the form on this Web site entitled "Compare mortgage offers instantly" you can compare lenders and different FHA mortgage rates. While FHA rates should be roughly similar from one lender to the next, even slight differences can be meaningful in dollar terms.
  10. Double-check your payment level at current rates. Once you know what current FHA mortgage rates are, you can double-check that the monthly payment would still fit your budget at those rates. If so, you should be ready to talk to FHA lenders!

FHA Mortgage Refinance

While FHA mortgages are most often associated with helping first-time home buyers, once you are a homeowner you may still have occasion to apply for an FHA mortgage if you refinance. In particular, if you develop bad credit, an FHA mortgage may be the only way you can refinance, and people with bad credit can refinance as a step toward putting their finances in order.

Since 1934, the FHA has helped some 35 million people become home owners. An FHA mortgage may be able to help you as well--both now, and in the future.

 Source:  MortgageCreditProblems.com, HUD, Freddie Mac, and Standard & Poors

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