FHA Home Loan – The Best Option for First Time Buyers?
FHA loans are a very popular and affordable choice if you are a first time home buyer.
It is a common misunderstanding that FHA loans are only for first time home buyers. There are restrictions if you own another home, or if you have another FHA loan, but you do not have to be buying your first home.
FHA loans are not restricted to first time buyers, but are a great choice if you have limited funds for down payment, and need flexibility with your debt to income ratios.
If you’re just getting started and trying to research FHA first time home purchase loans, here are some basics that will help you to determine if this is the best option for you.
The top 5 things you should know about FHA
1. Low down payment: This program allows for down payment of only 3.5% with no income limits or geographic restrictions. Conventional loans will allow as low as 3% down payment in low to moderate income areas with income limitations.
2. FHA loans require mortgage insurance: Mortgage insurance is simply an insurance policy that protects the lender in case you stop making payments on the loan.
This allows lenders to offer loans with less than 20% down payment. You are responsible for paying the premiums for this insurance policy. The FHA first time home buyer loan has both an upfront and monthly premium.
3. Upfront mortgage insurance premium (UFMIP): There is an upfront premium for mortgage insurance that is currently 1.75% of the loan amount. Here’s an example:
- Purchase price: $300,000
- Down payment: 3.5% = $10,500
- Loan amount: 96.5% of purchase price = $289,500
- Upfront insurance: 1.75%% of $289,500 = $5,066.22
Seems like a lot of money to have to come up with right? Not to worry, a FHA loan allows you to include this premium in your financed loan amount.
So, instead of having a loan amount of $289,500, it would include the $$5,066.22 and you would make payments on a $294,566.00 loan (the .22 cents has to be paid separate)
4. Monthly mortgage insurance premium( MIP): You will also pay a small monthly insurance premium that is included in your mortgage payment. As I write this, the monthly premium is .85% of the loan amount. Here’s an example:
- Loan amount after including upfront mortgage insurance = $296,113.00
- Monthly mortgage insurance premium: .85% = $2,516.96 (annual premium) divided by 12 = $209.75 added to your monthly mortgage payment.
Conventional loans also require mortgage insurance if you put less than 10% down payment. Conventional mortgage insurance is called PMI, or Private Mortgage Insurance.
5. Easier qualifying guidelines: A FHA loan makes it easier for first time buyers to purchase a home. Here’s an example of how a FHA loan is more flexible than a non-FHA loan:
- Allows higher debt to income ratio (determines how much of your income can be spent on mortgage payment)
- Allows for co-signer – A parent or family member can help you qualify
- Allows gift funds for down payment – You can get a gift from a family member to pay all of down payment
- No penalties for lower credit scores – Non FHA loans have increased closing costs if your credit score is under 740
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