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6 Things First Time Home Buyers Need to Know About FHA Loans

Copy of Understanding conventional mortgage terms

 

Federal Housing Administration (FHA) loans are an attractive offer for first time home buyers, as they allow for a low down payment, accept lower credit scores than conventional mortgage loans, and are government insured for both the buyer and the lender. However, there are important details that first time home buyers need to know about FHA loans that may not be apparent when shopping for a home and comparing rates.

FHA Loans were originally created to help first-time home buyers, or home buyers with either a history of bad credit or that could not provide a down payment that would purchase more than 20% of the home’s cost. The program was created after World War II to help finance homes for returning veterans and families of soldiers. Now, the FHA is one of the largest sources of mortgage funding, alongside Fannie Mae and Freddie Mac. FHA Loans account for roughly one-third of all mortgage loans issued in the US.


Down payment requirement

An FHA loan requires a downpayment of 3.5% of the home’s purchase price. Originally, this was one of the most attractive factors for FHA loans, as they were available to younger buyers with less savings. The FHA loan covers the remaining cost of the home.


Credit score requirement

FHA loans require a minimum credit score of 580, making them attractive to homebuyers with a lower credit score than what is required for conventional loans, 620. However, most lenders still require a score of 620 as an underwriting overlay.


Annual Percentage Rate

The APR for FHA loans fluctuates with the economy. In June of 2017, it is 3.375% for a 15-year fixed rate mortgage and 4.5% for a 30 year fixed rate mortgage. It fluctuates constantly, but only goes up and down drastically when the economy sees majors changes. The actual Note rate will be lower than the APR.

Shorter term FHA loans will have a lower APR, creating an incentive for homebuyers to sign a 15-year mortgage if the FHA loan requirements are attractive to them.


Approval amount for the loan

FHA maximum allowable loan amounts are also variable over time and even by location. However, in the past few years, many locales saw an increase in the maximum loan amount due to the rising cost of homes. Mortgage lenders will also be able to grant a higher loan limit based on the borrower’s information, such as their income, work history, and bank statements.

 

FHA mortgage insurance

After the 2008 recession, FHA loans began to require insurance for the full term of the loan. This provides insurance for both the mortgage lender, as well as the FHA insurance fund reserves.

The insurance is paid out in two separate ways: First, there is an up-front mortgage insurance premium of 1.75% of the loan amount, and while it is financed on top of the base loan amount, that is paid at closing. Second, there is a monthly mortgage insurance premium that is between 0.80% and 1.00% of the amount of the loan.


FHA loan approval

Borrowers must get their FHA loan through an FHA-approved lender allowing the lender to use some discretion when granting the loan. For this reason, home buyers may have to meet certain requirements for income, credit score, and work history in order to be approved by the individual lender. It is also possible that lenders charge different interest rates and closing costs, so it is important to ask about this when shopping for rates.

FHA loans create an opportunity for home buyers to purchase a home because of many beneficial differences from conventional mortgage loans. However, it is important to speak with your mortgage lender about their specifications for FHA loan approval, as well as any closing costs that may be presented.

 

 


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