SANTA CRUZ (June 13, 2009) - Contrary to popular perception, FHA loans are not restricted to first time homebuyers. Anyone, regardless of income, can qualify for an FHA loan as long as they are buying their principal residence. FHA loans are not available for investment or second home properties. When compared to conventionally available financing, FHA loans offer homebuyers the opportunity to buy a home with the lowest possible injection of cash. The minimum down payment with an FHA loan is 3.5 percent of the sales price. In Santa Cruz County, the maximum FHA loan available is $729,750. Combine this low down payment with the $8,000 tax credit the Federal government is offering first time homebuyers and you have a very low barrier to entry for those seeking their first homes.

Another important benefit of an FHA loan is that the homebuyer may receive a family gift for all of the down payment and closing costs and, to top it off, there is no reserve requirement. That means that after escrow closes the borrower does not have to have any money left over in any of his accounts. While this is not an ideal situation, it does allow more borrowers to qualify. Furthermore, sellers are allowed (and often do) to pay the buyer's closing costs. Closing costs can be substantial, given the fact that borrower must set up an impound account. These accounts will require a borrower to pay up to 7 months of property taxes in advance as part of the closing costs. For a $400,000 home, the impound account will increase the closing costs by $3,000 or more.

FHA offers more liberal qualifying debt-to-income ratios (DTI) than conventional lenders. This means that borrowers are able to buy a more expensive home than they could otherwise qualify for. While there is no published DTI maximum, our experience with automated underwriting is that borrowers can spend up to 55 percent of their gross income on the combination of their house payment and other long term debts.

If a borrower cannot qualify to buy the home of their choice because their income is inadequate, FHA loans accept co-signers. That means that the borrowers can combine their incomes with income from a family member that is not even going to live in the house to qualify for the mortgage.

When it comes to credit history, FHA loans are the most liberal. If it is your credit history that is keeping you from buying a home, consider looking into an FHA loan. If it is a lack of credit history that you have, FHA allows a borrower to "build"a credit history based on timely payments to such entities as insurance companies, utility companies, landlords, etc.

FHA loans require a level of expertise that is not offered by all loan originators and since the underwriting is so specialized, not all banks and lenders can provide an acceptable level of service to their borrowers. Using a direct FHA lender will help eliminate frustration. I will be speaking at a homebuyers' seminar this coming Wednesday, June17 from 6:30 - 7:30 pm. Come and find out what it takes to buy a home in today's environment. To reserve a space, email me  at Peter@SantaCruzHomeFinance.com.

This column is written every Saturday by Peter Boutell, Certified Mortgage Planner and a principal at Santa Cruz Home Finance. You may reach him at (831) 425-1250 of email him at Peter@SantaCruzHomeFinance.com.