First-time home buyers may be intimidated by the process – loan requirements, mortgages, finance, lenders. It can be difficult to know what to do if you have a low down payment and not the best credit. A good place to start in preparing yourself is to begin to understand the Federal Housing Administration (FHA) loan and how it may help.
FHA loans may be seen as warranties for the real estate market; they provide a certain level of protection for lenders in the event of borrower default. Typically, they are economical and accessible for buyers who are prepared to make a low down payment and have less than ideal credit.
FHA loans originated in the 1930s when the Depression caused amazingly high foreclosures and defaults, resulting in huge amounts of abandoned homes. The Federal Housing Commission (FHC) then began insuring mortgages to renew the housing market and protect lenders. The federal government has insured FHA-approved lenders for over 38 million properties since 1934. In the event of borrower default, the FHA pays a claim to the lender. The low down payment requirements for first-time buyers with a reasonable credit score make FHA loans quite popular.
IS AN FHA LOAN RIGHT FOR YOU?
Here are the loan requirements and borrower qualifications:
- Credit scores of at least 500. With scores between 500-579, a 10% down payment is required; scores of 580 and above may allow a down payment of at least 3.5%.
- A social security number and steady employment.
- An FHA-approved appraiser for the borrower’s property appraisal.
- Front-end ratio less than 31% of gross income. Depending on circumstances, approval may be given with a percentage of up to 40%.
- Back-end ration less than 43% of gross income. Up to 50% approval is a possibility.
- At least two years out of bankruptcy and re-established good credit.
- A minimum of three years out of foreclosure. Borrowers must restore good credit, with possible exceptions of mitigating circumstances and improved credit.
- Minimum appraisal standards. If the seller refused to agree to required repairs, the borrower must pay for the repairs at closing.
OBTAINING AN FHA LOAN
FHA loans’ maximum mortgage limits are dependent upon region. As home values have increased, so have the limits for FHA Forward Loans, which are used to purchase or refinance homes. Loan limits enable a borrower to build equity until they are able to pay down loan debt. The first step in getting an FHA loan is finding an FHA-approved lender. The lender can then help you get mortgage quotes based on your eligibility. Interest rates vary for FHA loans and are dependent on the borrower’s qualifications, including credit score, monthly income, and monthly debt. An FHA-approved lender can help you to determine your options: low monthly payments or closing costs, a possible shorter term on your mortgage, or something specific to a first-time buyer.
TERMS TO UNDERSTAND:
- An FHA down payment is the direct amount spent on a home, generally combined with a loan to cover the total purchase price. Down payments are often low and not dependent on an excellent credit score.
- Mortgage insurance is required for an FHA loan:
- Upfront Mortgage Insurance Premium (UFMIP) is not dependent on your credit score; 1.75% payment may be added to the price of the mortgage or paid at closing.
- Annual MIP (charged monthly) is combined into your mortgage payment and based on a percentage of the loan amount compared to the borrower’s loan to value (LTV), length of the loan, and loan size.
- FHA closing costs are unfortunately overlooked when considering expenses. Typically, closing costs are 3-5% of the loan but can vary depending on your credit. Closing costs may include credit reports, tax services, documents, appraisal fees, and home inspections.
- FHA-approved homes and communities must meet specific safety and security requirements.
- FHA construction loans may be available if you qualify as a first-time buyer and would like it to be new construction.
- For purchasing or refinancing an existing home that needs repairs, rebuilding, or upgrades, you may be eligible for one of two options for a 203(k) Rehab Mortgage:
- Streamlined allows for upwards of $35 for repairs, upgrades, and improvements.
- The standard version is for larger projects, including those homes that are completely demolished and rebuilt.
- An FHA refinance may make your equity go further and is only available to homeowners who use their home as their primary residence.
- If you owe more on your home than its value, or if your current mortgage rate is higher than today’s rate, an FHA Streamline Refinance may be a good option.
- Other refinancing options you might discuss with an FHA lender include FHA Simple Refinance, FHA Rehabilitation Mortgage, and FHA Cash-Out Refinance.
- An FHA 203b is a single-family, standard loan that is funded by a bank, mortgage company, or savings and loan association; the mortgage is insured by HUD. After meeting required FHA credit qualifications, borrowers may pay an annual premium for approximately 96.5% financing.
There are many options to consider! First-time buyers should consult an approved lender to become informed and make the right choices for home ownership. If you have questions about your mortgage needs, please contact our preferred mortgage lender – Jim Scheu with Shelter Home Mortgage at 404.906.6010 or click the blue banner just below to send him an email.
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This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument, strategy or loan option. Before acting on any information in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Always consult with your mortgage professional, independent attorney, tax advisor, investment manager, and insurance agent for final recommendations and before changing or implementing any financial, tax, or estate planning strategy.