Know Your Mortgage Options Before Buying Your First Home.
The Federal Housing Administration’s lending standards are designed to allow buyers who either don’t have a lot of cash to put down, or don’t have a high enough credit score to be able to buy a home. This makes FHA loans very popular among first-time buyers. As of this writing, the FHA requires just 3.5% down and a FICO score of 580, or even lower if the down payment is higher (although specific lenders may have slightly higher requirements). This flexibility does not come cheap, and there are several costs to be aware of before applying for an FHA mortgage.
The FHA charges a 1.75% upfront fee when issuing a loan, in addition to requiring borrowers to pay FHA mortgage insurance as long as they have the loan. This is charged at an annual rate of 1.35% of the average loan balance.
So, on our $200,000 example, this means an upfront fee of $3,500 plus a mortgage insurance payment of $225. This adds more than 20% to the monthly principal and interest payment, a significant expense.
The U.S. Department of Agriculture guarantees mortgages offered to buyers of homes in rural areas. Just like FHA loans, they have relatively easy qualifications when compared with traditional loans, and offer up to 100% financing. However, you must purchase in a rural area as defined by the USDA, and be under the maximum income requirement for the particular county you’re interested in.
If you or your spouse ever served in the armed forces, a VA loan could be a very attractive option for you. VA loans are available with no down payment whatsoever, and have similar credit requirements as FHA loans. Unlike FHA loans, they require no mortgage insurance, making them a very attractive option to those who qualify.