FHA Loan Basics for First-time Homebuyers
As a first-time homebuyer, you most likely have heard that the Federal Housing Administration (FHA) could help you take out a mortgage to fulfill your homeownership dreams. FHA loan is popular because it allows you to borrow funds to buy a home even if you don’t qualify to take out a conventional loan. Taking out an FHA loan is worth considering this year as the agency has increased the maximum loan amount you can borrow. Here are the FHA loan basics that you need to know as a first-time homebuyer:
FHA only secures the amount you borrow
Even though it’s called an FHA loan, FHA itself doesn’t lend you money to buy a home, a private lending company or a bank does. If you take out an FHA loan, the FHA guarantees to repay the lending company that lent you money if you stop making monthly payments.
Lenders could offer you lower interest rates
Lending companies could offer competitive rates to FHA loan borrowers because they know that the FHA will repay them if a borrower starts to default with his or her mortgage payments.
You could borrow up to 96.5 percent
Taking out an FHA loan lets you borrow up to 96.5 percent of the total purchase price, which means that you can put a down payment for as low as 3.5 percent. The maximum FHA loan limit this year is $331,760 and if you qualify for a 3.5 percent down, you’ll only pay $12,032 for a down payment.
No minimum income requirement
FHA helps low to moderate-income earners to buy a home. You may qualify to take out an FHA loan if you can prove that you have a steady source of income, regardless of how much you earn to repay the amount of loan you’ll borrow. You also need to prove that you have enough funds left from your paycheck to repay your monthly mortgage after paying your other monthly obligations.
You can use gift money to finance down payment and closing costs
If a family member or a close friend gives you money as a gift, you can use it to pay for the down payment and closing costs. However, if you’ll use gift money when you take out an FHA loan, you are required to submit supporting documentation sufficient to prove to the lender that the money is a gift that you don’t have to repay.
You don’t need a high credit score to take out an FHA loan
Conventional lenders typically prefer borrowers who have 700 and above credit scores simply because there’s a lesser chance that they will default with their mortgage payments. But since the FHA secures the mortgage you’ll take out; a lender may approve you even if you have a credit score of 580.
Taking out an FHA loan requires a mortgage insurance premium
If you qualify to put a 3.5 percent down payment for an FHA loan, you will be required to have a mortgage insurance premium or MIP. It’s a policy like private mortgage insurance (PMI) that protects your lender in case you can no longer pay your monthly mortgage. After paying a 1.75 percent (of the home loan) upfront MIP upon closing, you’ll pay an ongoing MIP fee every month until you completely repay your mortgage. Keep in mind that you cannot cancel your MIP on your FHA loan.
Consult with a LendUS loan advisor to learn more about FHA loans
FHA loans could help you fulfill your homeownership dreams even you have a low income and less than average credit score. However, if you plan to take out an FHA loan, a professional LendUS loan advisor could give you invaluable insights to better understand your options.