FHA Loans: Four Mistakes To Avoid

Strapped homeowners are crying "uncle" as home values dip and foreclosures continue. "Uncle" in this case would be "Uncle Sam" and his Federal Housing Administration (FHA) loans.

The U.S. government has long provided its citizens with a safety net when times are tough. One long-standing program is an FHA loan, in which the government agency insures loans against default. Approved lenders are allowed to issue the loans, which tend to be less restrictive to borrowers facing economic hardship.

The subprime mortgage crisis has produced plenty of homeowners facing tough times. If you find yourself in this situation and you're considering applying for an FHA loan, here are some common mistakes to avoid:

1. Failing to look at your credit report

In considering your loan application, an FHA-approved lender will take a look at your credit report and score. Your credit report is a summary of your debt load and your ability to pay your bills on a timely basis. Before you apply for a loan, take a look at your credit report. It may contain some errors that could lower your score. Only after you've carefully reviewed your report should you initiate the pre-approval process.

2. Ignoring other options

A common mistake for many lenders is to apply only for an FHA loan. Before you make a lending decision, carefully analyze the pros and cons of other types of mortgage loans, as well. You'll want to take into account the fact that an FHA loan requires both an upfront and ongoing fee, much like private mortgage insurance. For homeowners who can't qualify for other loans, the fee is unavoidable. However, you may have the flexibility to qualify for other, less costly loans.

3. Bypassing the pre-qualification process

Getting pre-qualified for a loan should be a standard part of the shopping process. The process doesn't guarantee that you'll get a loan, but it will give you a general idea whether or not you meet the lender's requirements. It will cost you nothing, and your shopping will be much more efficient.

4. Carrying too much debt and overspending during the approval process

The FHA doesn't look approvingly on heavy debt burdens. Part of the approval process involves analyzing your debt-to-income ratios, which is the amount of your current debt compared to your income. You can improve your debt-to-income ratio by paying off credit card balances or other outstanding loans. You'll also want to put a moratorium on spending-particularly on big-ticket items. Putting a large purchase on the plastic will raise a red flag to any lender.

FHA loans have helped countless homeowners in the past. With rising foreclosure rates, their government backing makes them an attractive option to lenders and borrowers alike. They may be a good fit for you-just be sure to avoid these common mistakes before you apply.