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Is an FHA loan the best option to buy a home after foreclosure?

Discussion in 'Mortgage After Foreclosure' started by Jon Maddux, Jun 27, 2013.

  1. Jon Maddux

    Jon Maddux Call 1-800-779-4547

    The short answer might be yes. However, it's a little more complex than that and other questions need to be asked to determine if this is the best loan for you.

    1. Do you plan on keeping the new home for less than 5 years?
    2. Does my income level prohibit me from getting a tax deduction on private mortgage insurance payments?
    3. Do I have 25-30 percent to put down on the house?
    4. Am I eligible for a VA loan? (You must not have previously foreclosed on a VA loan)
    5. Did I have a foreclosure (or short sale) less than 3 years ago?

    If your answer is "no" to the above questions, then most likely, a FHA loan is your best and possibly only option.
    Keep in mind, FHA now requires mortgage insurance upfront and monthly for life on 30 year loans. On 15 year loans it's now 11 years. That additional payment will put your "effective" interest rate at much higher level. In other words, the amount that you will be paying each month will be equivalent to a loan with a significantly higher interest rate. It's important to note that private mortgage insurance (PMI) is tax deductible unless you make too much income. (Check with your CPA)

    In my opinion, FHA loans are a great means to an end. With 3.5% downpayment, you can get back into homeownership just 1 year after foreclosure. Provided your foreclosure was due to a loss of 20 percent or more of your household income. I have seen buyers get approved with credit scores as low as 580. Also FHA loans typically and presently have lower interest rates than conventional. However, be prepared to have a little harder time finding a property because many condo's are not approved by HUD. So you should be prepared to find a Single Family Residence. Also, in a sellers market, (which many cities are presently in) sellers tend to pick conventional and cash buyers over FHA approved buyers.

    So if you answered "yes" to the above questions, there are other options.

    The other options are ARM loans and portfolio bank loans that require 25-30% down payments. These adjustable rate mortgage (ARM) Loans are also a great means to an end. They come in fixed terms for 3 / 5 / 7 and 10 year fixed periods with payments based on a 30 year term. I know the term "ARM" is a sore subject with the mortgage crisis so fresh in all of our minds, however we have to remember how toxic the loans were during the bubble with lenders approving loans without verifying income, assets or jobs and more importantly not requiring a down payment. That has changed significantly and buyers cannot get approved without income verification and a down payment.

    I think it is vital to consider all risks when buying a home and there are risks with an ARM loan. So, be careful and make sure you have significant reserves and could afford a 2% rate increase on your mortgage payments if considering an ARM loan. Clients of mine that have chosen to buy their new homes with ARM loans are locking their rates in the low to mid 4% range on a 5/1 as of the date of this posting. Keep in mind, these borrowers are putting down 30% and have very low debt to income ratios. If you have any questions, please don't hesitate to contact me through jonathan@afterforeclosure.com
    Last edited: Sep 24, 2013
  2. Jon Maddux

    Jon Maddux Call 1-800-779-4547

    One more thing. You don't have to be a first time homebuyer to qualify for a FHA Loan. Also FHA Loans don't require you to make a certain amount of money, they are simply loans that are guaranteed by the government and offered to all qualified borrowers. You can put as much money down as you would like, however you can put as little as 3.5 percent down.

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