Understanding FHA Mortgages

fha mortgage paperworkYou may not know it, but you can actually purchase a home with less than 20% down payment. Many first-time buyers find saving for a big down payment is extremely daunting, but an FHA loan could be the perfect solution.

However, there are a few things to know before you apply for preapproval on a loan. You need to pick the right loan for your financial situation. Saving for a large down payment is difficult and requires time. You’re not alone. Few people have 20 % to put down on their first home.

For example, a home priced at $303,000, would require you to have saved more than $60,000 in order to reach the 20% mark. But, what if you’re ready—other than that having that big down payment saved? Owning a home can actually be less expensive, depending on what you pay monthly in rent.

Considering the record-low interest rates and thriving market, many first-time buyers find themselves in this situation. But, most of them—about 70%—don’t know that there are FHA loans available that solve this challenge.

What’s an FHA Mortgage?

The Federal Housing Administration (FHA) backs mortgages requiring as little as 3.5% in a down payment right now. This means anyone can apply, and the only caveat is having fairly good credit.

Here are a few facts to know when applying:

  • With the lower down payment comes more paperwork and the home will have to pass FHA standards during the home inspection.

  • Minimum credit scores for FHA loans depend on several factors. To get a mortgage with a down payment as low as 3.5%, you must have a credit score of 580 or higher. Those with credit scores between 500 and 579 must make down payments of at least 10%. People with credit scores under 500 typically are ineligible for FHA loans. The FHA may make allowances under certain circumstances if you have what it calls "nontraditional credit history or insufficient credit" but otherwise meet their requirements. Ask your FHA lender or an FHA loan specialist if you qualify.

  • FHA borrowers will also be required pay Private Mortgage Insurance (PMI) on the loan in addition to the principal and interest, which will raises the monthly payments. Essentially, PMI provides insurance for the lender in case you default on the loan, which is a greater financial risk if you put only 3.5% down.

  • Because of that insurance, lenders often offer FHA loans at attractive interest rates and with less stringent and more flexible qualification requirements.

  • You can use your savings to make the down payment, but other allowed sources of cash include a gift from a family member or a grant from a state or local government down-payment assistance program.

  • Your closing costs can be covered by builders, sellers, or even the lender, though it may raise your interest rate a bit.

  • It can save you money to shop around for your lender. Because the FHA is an insurer, not an actual lender, borrowers need to get their loan through an FHA-approved lender. Not all FHA-approved lenders offer the same interest rate and costs—even on the same FHA loan.

It’s a great time to buy, even if you consider yourself “credit-challenged”, and you may very well qualify for an FHA loan. The only way to know is to take that first step.

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