Many people wanting to buy a home give up too early. They think it is too hard to get a loan. They believe that if they can’t qualify for a conventional, USDA, or VA loan, then their dream of owning their own home is over. But there are other types of loans available to first time homebuyers and persons who need more help. There are FHA loans, which have more lenient credit requirements, along with a fairly low down-payment requirement. Does this sound something like you’d be interested in? Read on, then, to find out what you need to know about FHA loans when buying a house.
Overview of FHA Loans
Before you jump in and make the decision to get an FHA loan for buying a house in Floresville, you need to know that you need to know first. So let’s start with a brief overview of FHA loans.
“An FHA loan is a mortgage insured by the Federal Housing Administration. With a minimum 3.5% down payment for borrowers with a credit score of lower credit score, FHA loans are popular among first-time home buyers who have little savings or have credit challenges. And FHA loans allow a seller to contribute towards a buyer’s closing costs; not their down payment as the buyer does have to have that saved or gifted to them but towards the loan costs to close the loan.
“The FHA insures mortgages issued by lenders, like banks, credit unions, and non-banks. That insurance protects lenders in case of default, which is why FHA lenders are willing to offer favorable terms to borrowers who might not otherwise qualify for a home loan.”
Keep in mind, though, that only FHA-approved lenders can issue FHA-insured loans. But an FHA loan “can be used to buy or refinance single-family houses, two- to four-unit multifamily homes, condominiums, and certain manufactured homes. In addition, there are specific FHA loans that can be used for new construction or renovation of an existing home.
FHA loans are very common in some areas; at one time the San Antonio area the FHA loans were 85% of the market.
FHA Loans vs. Conventional Loans vs. VA Loans
To help you get an even better handle on buying a house with an FHA loan, let’s see how FHA loans differ from conventional loans or VA loans.
- Conventional loans are not “insured or guaranteed by the federal government.”
- VA loans are insured and guaranteed by the federal government but only military personnel past or present are eligible for a VA loan.
- FHA loans allow lower qualifying credit scores and (sometimes) lower monthly mortgage insurance.
- “FHA rules are more liberal regarding gifts of down payment money from family, employers, or charitable organizations.”
- “FHA loans may involve closing costs that aren’t required by conventional loans.
How FHA Loans Work
Before buying a house with an FHA loan, you should also know something about how they work.
The typical FHA loan comes in either a 15-year or a 30-year term with a fixed interest rate. But the lenient standards come with a catch. “Borrowers must pay FHA mortgage insurance, which is designed to protect the lender from a loss if the borrower defaults.
In addition, all FHA loans require the borrower to pay two mortgage insurance premiums . . .
- An upfront mortgage insurance premium of “1.75 percent of the loan amount, paid when the borrower gets the loan” (though the premium can be rolled into the loan amount)
- Annual mortgage insurance premiums of 0.45% to 1.05%, “depending on the loan term (15 years versus 30 years), the loan amount, and the initial loan-to-value ratio
The good news here is that for most borrowers who financed 90% or less of a home’s value, these insurance premiums will be canceled after 11 years. In addition, FHA lenders can charge no more than 3-5% of the loan amount in closing costs.
Qualifying Criteria for FHA Loans
Buying a house with an FHA loan means that you’ll have to meet certain qualifying criteria, such as . . .
- A down payment of 10% with a lower credit score, but a down payment of 3.5% with a higher score which is still lower than other types of loans.
- A verifiable employment history of two full consecutive years
- The house is to be used as a primary residence only
- Passing an appraisal by an FHA-approved appraiser, as well as meeting HUD guidelines in regards to items such as safety.
- A front-end debt ratio of a maximum of 31%
- A back-end debt ratio of no more than 43% of gross monthly income
- A two-year wait “before applying for the loan after bankruptcy or three years after a foreclosure
FHA Loan Pros and Cons
And now let’s look at some of the pros and cons of buying a house with an FHA loan.
Pros
- Lower credit-score requirement
- Relatively low down-payment requirement
- Opportunity to stop renting sooner owing to the ease of an FHA loan
Cons
- Mortgage insurance requirement
- Eligibility requirements for a property
- An APR often higher than with conventional loans
- FHA loans available only through FHA-approved lenders
FHA loans are very attractive and a great way for first-time buyers with less than sterling credit to get into home ownership. There are, however, some qualifying criteria, as well as definite pros and cons that must be taken into account. So how do you determine whether an FHA loan is right for you? Our team of experienced Floresville agents can help. They can help your find qualifying houses and guide you through the process. When buying a house is on your horizon and you’re considering an FHA loan, be sure to contact us at (210) 216-7722.
Floresville Real Estate Agent – Faye Y Taylor Realtor® is here for help and to answer any questions you might have
Serving all of Wilson County and the South Texas area