If you are looking to buy a home in Chicago or the collar counties (Cook, Dupage, Will, Lake and McHenry), FHA financing may be a great fit for your needs. The mortgage market has changed recently. Not long ago there were all sorts of programs for buyers with little or no money for a down payment, even if their credit history was spotty. Things have changed. Lenders have tightened their guidelines, and most of these programs have disappeared. At one time, FHA was the only option if you wanted to buy but were strapped for cash. History is repeating itself and if you know how it works, FHA can make the difference between buying a house now, and renting for another year.
FHA loans are federally insured mortgages targeted toward increasing home ownership for people with moderate incomes. In the Chicago area you can get a mortgage up to the limit of $275,200 (Higher for a 2-4 flat). Because this is typically a 3% down payment loan, this means a purchase price of around $280,000. This figure changes every year, and many experts expect that the limit will be raised considerably in order to make up for the loss of so many other financing options.
Some of the reasons FHA may be right for you include:
A common sense approach to credit. FHA doesn’t require perfect credit. If you have had problems in your past, they will want to know what happened and what you have done to correct the problems. A few isolated late pays are no problem. If it is something bigger, they usually require a twelve months of good credit history.
Past bankruptcies are OK. If you are looking at conventional loans, they will require that you wait at least 3 years after a bankruptcy was discharged. FHA allows a new loan after 2 years, one year if you can show that the circumstances that led to the bankruptcy were beyond your control (medical problems, loss of job or similar situations). You will have to re-establish credit, and show that you can afford the new payment.
Low and in some cases, no down payment. Conventional loans usually require a minimum of 5% for a down payment. FHA only requires 3%, but this can be structured so you are not using any of your own money at all. One way to do this is through a gift from a family member. Another way is by using a grant program (Nehemiah and AmeriDream are two of the biggest).
Here is how it works. FHA allows a seller concession of up to 6% of the purchase price. When you negotiate the contract with the seller, you would ask for a concession on the price upfront -- the amount will usually be between three and a half to four percent of the price (more if you want to build in closing costs, too). Three percent will go for the down payment; the rest goes to pay for the organization’s administrative costs. The seller agrees to give this negotiated concession to the grant provider at the closing table, and they in turn give a "grant" to you for your down payment. This is all done on paper and no money really changes hands.
These are just a few of the advantages of FHA financing. Whether this is the best option for you depends on your goals and your personal situation. But for many buyers this is the best way to buy a home in today’s market.
Pete Thompson is a long time resident of the Chicago area, and has been a mortgage loan officer specializing in helping first-time home buyers since 1992. Go to http://www.ptmortgage.com for a Free copy of The Real World Home Buyer's Guide – How to save thousands when buying a home and getting a mortgage.
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