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FHA Home Loans - The Best Option for First Time Buyers?

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.

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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.

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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.

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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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Ask any questions in the comments section below, and I will be instantly notified and typically answer questions very quickly.

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About Your Expert

Scott Schang

A 20 year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues, and making sense of complicated real estate and mortgage topics on this website since 2007

Leave a Question or Comment About this Topic

  • George Wynn says:

    What is the lowest credit score that you can get a loan with.

    • Scott Schang says:

      Hi George, it depends on what kind of loan you are using. FHA will go down to 500, but it’s more restrictive with debt to income ratios due to manual underwriting guidelines. You can typically get an automated underwriting approval down to 580. Many lenders will put “overlays” on top of FHA guidelines and require a higher credit score. If anyone is telling you 640 and above, try to seek out a mortgage broker that has the ability to match you with a lender that allows lower scores. If you would like an introduction to someone that can help, shoot me an email to scott@findmywayhome.com. Hope this helps?

  • Charles Varner says:

    I’m a first time buyer,want to apply for a loan fha. My spouse is cosigner my credit 639 her’s 679 what are our chances of getting the loan. Plus I have 3,000 in my savings account?

    • Scott Schang says:

      Hi Charles,

      Congratulations on starting down the path to owning your first home! Your credit scores will meet both FHA and Conventional guidelines. It sounds like the more important factor is going to be the down payment requirement. Conventional loans offer as low as 3% down payment, FHA requires a 3.5% down payment.

      Your closing costs can be paid for with a lender credit, real estate agent credit, or seller credit.

      I can introduce you to someone that I know and trust that specializes in guiding first time buyers through the process of buying your first home.

      If you would like, send me an email to scott@findmywayhome.com and let me know what State you’re buying in, and I’ll make an introduction.

      Hope this helps?

  • Tony says:

    I have had an FHA for a couple of years now, at what point can I make the case to remove the MIP?

    • Scott Schang says:

      Hi Tony,
      FHA mortgage insurance can only be removed by refinancing out of the FHA loan. Conventional mortgages with private mortgage insurance allow you to “petition” the lender once the principal balance drops below 80% of the original loan.

      FHA mortgage insurance is required as long as you have an FHA loan, regardless of how much equity you have.

      I’m happy to introduce you to a professional that can run the numbers for you and show you what options might be available? Simply shoot me an email with the State you live in, and I’m happy to make that introduction!

      Hope this helps?

  • Marcus Ramirez says:

    Does the person on the mortgage have to occupy the home?

    • Scott Schang says:

      Hi Marcus,

      FHA does allow you to use a non-occupying co-borrower, but one of the buyers must live in the home. FHA can only be used for financing a home that you will live in as your primary residence. You cannot use an FHA loan to buy, or refinance a rental property.

      Hope this helps?

  • guest says:

    with a fha loan does the house have to book for more than the property

    • Scott Schang says:

      Hi Rebecca, I’m not sure I completely understand your question – are you saying that the land is worth more than the home? That would be unusual, and most likely would create questions why that is. Is it that there is no value in the home, or that there is just more value in the land?

      If you would like to elaborate, and send me a little more detail about your situation, you can email me directly to scott@findmywayhome.com

      Hope this helps?

  • In Need of Advice says:

    With an FHA loan do you have to make a certain number of mortgage payments before you can refinance and it be approved?

    • Scott Schang says:

      Yes and no. I know, that’s a confusing….Let me explain. There isn’t rule against refinancing an FHA loan at any time for any reason. If you refinance a new loan in less than 6 to 9 months, the lender that did your loan the first time could have to pay back any money they made from doing that loan for you. This is called an EPO, or early pay off penalty. The EPO could be a motivating factor for your lender telling you that you cannot payoff a loan they just gave you.

      If you are trying to do an FHA to FHA loan, you do need to have made a minimum of 6 months payments before being able to take advantage of that program.

      If your question is regarding using a new appraised value, most lenders will require that you have the FHA loan for 12 months before being able to use a new appraised value for a cash out refinance.

      I know, a lot of options here. If you would like to contact me directly, shoot me an email to scott@findmywayhome.com with the details around your specific situation, and I’m happy to help you explore your options.

      One last thought is that individual lenders may choose to have “overlays” that determine when you can refinance your current loan.

      Hope this helps?

  • Haley says:

    My wife’s credit score is in the low 500s and mine is 680. Does that mean we would not qualify for an FHA loan because her’s is not over 640?

    • Scott Schang says:

      Hi Haley, this is a really good question. FHA will use the middle score of the lowest scoring borrower when underwriting your loan. If your wife’s income is required to qualify for the loan, then her credit score will be considered. That said, FHA will allow credit scores far below 640. If a loan officer is telling you that you need a minimum 640 credit score, that is a rule imposed by that lender and does not apply to all FHA loans.

      If you would like to further explore this, feel free to email me directly to scott@findmywayhome.com and I can help you find the best path to home ownership. If you need an introduction to a FHA lender that will work with a credit score under 640, I can help with that too!

      Hope this helps?

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