If you are looking at buying your first home, you will want to explore all of your mortgage loan options. You may qualify for an FHA loan or another special loan program that will benefit you greatly. The first step will be to talk to a trusted mortgage lender who can help you determine what you might qualify for in terms of a mortgage rate and maximum loan amount. Getting pre-qualified—or even better, pre-approved—for your loan will give you a significant head-start when beginning your first home search.
FHA Loan Availability
There are many different loan programs available to first time home buyers. One of the best is an FHA loan. These loans are insured by the U.S. Federal Housing Administration (USFHA) and must be secured through an FHA-approved lender. They have flexible and forgiving terms and lower qualification requirements than standard mortgage loans. You may be able to get a lower interest rate, lower down payment and lower monthly payments, even if your credit score isn’t all that spectacular.
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If you are tired of renting or just ready to buy your first home, you will want to look into your FHA loan opportunities. It may be your best way to make your dream of homeownership a reality.
FHA Loan Benefits
Let’s take a look at specific borrower benefits associated with FHA loans:
Lower Down Payments—If you qualify for an FHA loan and have a FICO score of at least 640, you can put down as little as 3.5% of the purchase price as your down payment. You can use that extra money you might have already saved up toward fixing up your new house or condo or to pay off higher interest debts like car loans, student loans or credit card balances. This doesn’t necessarily mean you should just pay the minimum down payment, though. If you can afford more, you may want to invest a larger percentage to secure a better interest rate, buy down points and/or lower your monthly payments.
Easier to Qualify—Compared to conventional mortgage loans or jumbo loans, FHA loans have less stringent qualification standards. You can have a debt-to-income ratio (DTI) as high as 55% and you can utilize gift funds from family members toward your down payment. You can also have a co-signer on your FHA loan from someone who doesn’t occupy the property with you. To qualify for an FHA loan, you will still have to display a steady income and show proof of employment for at least the past two years, and the home you are buying must be your primary residence.
Favorable Interest Rates—Many FHA loans offer excellent interest rates. In some cases, the rates are below market averages. As a home buyer, you will quickly learn that it’s good to do anything you can to get your mortgage rate down. This lowers the monthly payments and reduces the interest you will pay over the life of a standard 30-year fixed loan.
Seller Can Pay Closing Costs—Under an FHA loan, the seller (and other interested parties) can contribute up to 6% of the sales price toward the buyer’s closing costs—including prepaid expenses, discount points and other financing concessions. This is another excellent benefit of an FHA loan that you will want to discuss with your lender and your real estate agent when making purchase offers.
Other Factors to Consider
If you have had a major credit event in recent years (such as a bankruptcy, foreclosure or short sale), you may be subject to a specified waiting period before you can apply for an FHA loan. It is important to restate the fact that the property you purchase must be your primary residence in order to qualify for an FHA loan. That said, the property could be a single-family home, townhome, condominium or multi-family home (duplex, triplex, etc.) as long as you occupy one or more of the units.
Private Mortgage Insurance (PMI)
One minor drawback of an FHA loan is that you will be required to pay private mortgage insurance (PMI, also known as mortgage insurance premiums or MIP). This will be an additional insurance premium that you pay with each monthly payment until you have paid off 20% of the mortgage principal or more. If you have put at least 20% down, then you won’t have to worry about paying the PMI. Otherwise, it will be there until you have reached that payoff amount.
When you are buying your first home in, it pays to understand your mortgage options and see what types of special loans you can qualify for. If an FHA loan makes sense for you, it is a great solution that helps many home buyers each and every year—including those who may not qualify for a traditional mortgage loan.
If you would like to learn more about FHA loans or get started on your FHA loan pre-approval application, contact us today for honest advice and expert loan guidance.