How to Decide if an FHA Loan is Right for You

When you begin your search for the perfect home, one of the first pieces of information you need to determine is how much you can afford to spend on your home. To calculate this number you will need to examine your budget but also investigate how much money a lender will offer you.

Many potential home buyers prefer to get pre approved for a mortgage before they even begin their house hunt to avoid disappointment and to speed up the offer process once they find their dream home.

As you investigate your mortgage options you will quickly become aware of the benefits of an FHA loan. This is a mortgage from a private lender but it is guaranteed by the federal government so the qualification standards are not as strict as a conventional loan. Knowing about this great opportunity will certainly lead you to another question. Are FHA loans only for first time home buyers? The answer may surprise you.

FHA loan

Who Qualifies for FHA?

The FHA loan is a program which was created to assist home buyers in their purchase of a house. It requires a lower down payment making it much easier for a consumer to be able to finance their first home. A conventional loan can require as much as 20% but an FHA only requires 3.5% which is much more manageable for most homebuyers. In addition the credit score requirement is lower so more of the population can qualify. An applicant with a credit score of 580 or higher qualifies for the full benefit of the program while an applicant with a score of 500 to 579 will need to make a higher down payment of 10%.The plan was designed to allow first time homebuyers the opportunity to purchase and then refinance to a conventional mortgage in a few years. But the best part of this plan is that anyone can apply for this type of loan, it is not limited to first time home buyers. This system has become very helpful to homeowners who are purchasing a second or third home but have a lower credit score due to a financial issue. (Learn how to start building credit here).

Know Your Lender

Another important fact to remember is that the FHA is not your actual lender, they are simply providing the “insurance” to the lender on your behalf. The biggest reason that you need to understand this is to know that not all FHA loans are equal. It is up to the discretion of the actual lender to set the terms of your mortgage loan. That means that you will want to shop for an FHA loan from several lenders and then compare not only the interest rates that they are offering but also the fees that they charge for the loan itself and their services associated with the loan.

Other Fees on an FHA Loan

As stated before, the FHA is really insurance on a mortgage, so there are some costs involved in having this type of loan. The first is an upfront premium of 1.75% of the loan amount. You are paying $1,750 per $100,000 borrowed for an FHA loan. This premium amount is due when you get the money for your loan but it can be rolled into the loan amount. The second fee is called an annual premium but it is actually paid monthly. This fee varies based on the amount of the original loan and is between .45% for a 15 year loan and .85% for a 30 year loan as long as the amount borrowed is less than $625,000.

Another Great Advantage to FHA

There is a special program, called a 203(k), which FHA borrows can use. This program is designed to help out borrowers who are going to need additional money to make non structural repairs to the home that they are purchasing. The loan is not based on the current value of the home but instead the projected value of the home after the repairs are completed. The maximum cap on this feature is $35,000 and offers homeowners a great way to finance projects such as new cabinets or flooring for a new home.

Additional Info to Know

FHA loans are a great way for a consumer to be able to buy a first home or buy a home without a huge down payment. But the program was designed to help consumers move from renting into homeownership so the program is only available on a borrower’s principal residence, it can’t be used on a rental property or on a second home or vacation home. Borrowers also need to show stable employment for the past two years to qualify. Normally the employment needs to be full time and in the same industry to demonstrate stability and the ability to make continued payments. If the borrower is self-employed, they will need to support their employment records with two years of income tax records to be considered for an FHA loan. Closing costs on a mortgage can be expensive. A conventional loan only allows the seller to contribute 3% of any closing cost but an FHA loan allows sellers to pay as much as 6% of the closing costs. This is simply another means of reducing the amount of cash that a borrower needs to have when completing a mortgage loan.

FHA Can Be a Great Opportunity

In the end, the FHA backing for mortgage loans is a great program which offers consumers who do not qualify for a conventional loan a way to purchase a home. The idea is to offer a mortgage that requires less cash up front but there is a cost for this feature. Not only does the borrower pay for the service in the form of a premium but they also pay a smaller amount each month that they continue to use the service. For this reason, many homeowners will choose to refinance after a few years. But the most important fact to remember is that this is not a one-time program. Most borrowers wonder, are FHA loans only for first time home buyers and they need to complete their research to learn that this benefit could be available for them even on a second or third home purchase.

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