FHA Loans for First-time Home Buyers
Getting an HUD Insured Home Loan with Low Down Payment
FHA loans are attractive for first-time home buyers with a less than perfect credit history and who find it difficult to come up with the 10 to 20% down payment.
FHA loans are once again gaining popularity due to a variety of reasons. Their market share dropped significantly during the period from 2000 to 2007 due to the surge in popularity of sub-prime loans and loans that allowed zero down payment. However the recent sub-prime crisis and the flurry of foreclosures led to most of the lenders tightening the mortgage requirements. FHA loans are once again becoming a viable option for low-to-middle income families for acquiring home loans. The recent bridge loan for the $8000 tax credit which is limited to FHA loans may well be another boost for the popularity of FHA loans.
How FHA Loans Work
The FHA loans are available to purchase or refinance a principal residence. Federal Housing Administration(FHA), which is a part of HUD do not fund a loan, instead they insure the loan. The mortgage loan is funded by a lending institution, such as a mortgage company, bank or savings and loan association.
Borrowers are required to pay a small upfront mortgage insurance premium(1.5% of the purchase price) and a small monthly mortgage insurance (MMI) premium.
Advantages of FHA Loans
1. Low Down Payment- The minimum down payment requirement for FHA loans is 3.5%. Combined with a HUD down payment assistance grant or other similar programs, the borrower can often purchase a home with zero down payment.
2. Less than perfect credit history- FHA loans are ideal for borrowers with less than perfect credit history who will find it difficult to qualify for a conventional loan. Since the loan is guaranteed by the government, lenders will
3. Ideal for first-time home buyers- The typical first-time home buyer is someone who is young and in the early stages of their career. They will have other student debts and will find it difficult to come up with the 5 to 20% down payment required for a conventional loan. They are also likely to have a blemished credit history. FHA loans are much more suited to this type of home buyers because they allow for higher debt-to-income ratios, less than perfect credit history and lower down payment.
4. Down payment can be gifted by a family member or non-profit organization- One significant advantage of FHA loans is that the down payment can be gifted by a parent, a government agency or a non-profit organization which will allow people with out money for down payment to buy a home.
5. Foreclosures and bankruptcy- While borrowers whose homes have been foreclosed or who have gone into bankruptcy will have to wait for a longer period to get a conventional loan, FHA will allow a home purchase two years after a Bankruptcy and three years after a foreclosure.
6. No prepayment penalties- FHA loans do not have any prepayment penalties and can be easily refinanced.
7. Higher debt-to-income ratios- The maximum allowable debt-to-income ratio for a FHA loan is 41%, which is higher than most conventional loans.
Limitations of FHA Loans
Relatively low limits- One important disadvantage of FHA loans is that loan limits for FHA loans is typically less than the loan limits for most conventional loans. If the loan amount exceeds the loan limits, the borrowers will have to contribute additional money or they will have to look for other types of loans.
Borrowers with good credit history can find better rates- FHA loans are typically for borrowers with a blemished credit history or who find it difficult to come up with the 10 to 20% down payment. Borrowers with a good credit history who can also come up with the 10 to 20% down payment can find better rates with conventional loans.
FHA loans are a great option for first-time home buyers who are looking to buy a home in this buyer’s market. Lenders are willing to give better rates even with tighter credit norms since they are assured that the loan will be paid off by HUD in the event of a foreclosure.