If you are a first time home buyer you may be thinking about an FHA mortgage. These mortgages are guaranteed by the U.S. Federal Housing Administration and are designed with low-to-moderate income home buyers in mind. FHA mortgages feature less stringent income requirements for buyers.
For instance, buyers only have to produce a 3.5% down payment and can have a less-than-perfect credit score. If you're planning to purchase a home with an FHA mortgage, here are some important tips to keep in mind.
Hallmarks of FHA Loans
The main reason that first time home buyers opt for an FHA loan is that qualifying is easier, and the down payment is only 3.5 to 5 percent. A credit score in the 600s will typically suffice. Compare these requirements with those of a conventional loan, and you'll easily see why many first time home buyers find the FHA route to be attractive.
A conventional loan requires buyers to put down at least 20 percent of the home price and requires credit scores around 700 (different lenders have different requirements).
Improve Your Credit
As you investigate FHA mortgage programs, it will become evident that even though someone with a credit score in the low 600s may qualify for a home mortgage, a better credit score will allow for a better financing deal. There's a misconception that many home buyers who rely on an FHA mortgage have bad credit.
That's simply not the case. While their credit might not hit the 700 mark, most FHA mortgage holders have a credit score around 680. If you have some time before purchasing a home, it's always best to improve your credit as much as possible in order to secure better rates.
Hold Some Down Payment Money Back
If you're planning to buy a home with an FHA mortgage, be sure to take advantage of its reduced down payment requirement. Sellers can also contribute up to 6 percent.
Say that you have enough to put down a 10 percent payment. It's still less than the 20 percent required by a conventional mortgage, but within a few months you experience a home emergency that isn't covered by your home owner's insurance.
For example, your sewer line going out to the main lines could suffer a broken tile. This type of repair could run you about $5,000. Leaving yourself with a cushion allows you to more easily handle major home repairs that come up.
FHA Mortgage Limits Change
Keep in mind that if you research FHA mortgage limits one year, they may change the next, and FHA programs may be different in different parts of the country.
You'll want to look closely at FHA program comparisons from state to state.
FHA Gotchas to Be Aware of
Are there any gotchas to be aware of when opting for an FHA loan? There are pros and cons to nearly any type of mortgage you opt for when purchasing a home. The main FHA mortgage gotcha is the required Private Mortgage Insurance (PMI) until you reach below 80% Loan To Value (LTV) threshold.
While FHA insures its' loans, borrowers pay part of this insurance. FHA private mortgage insurance can sometimes add up so make sure to use a mortgage calculator that displays that info clearly and easily.
So, while buyers have to put down less up front for their home purchase, they do have to pay a monthly FHA insurance fee that's typically included with their monthly mortgage payment.
If you're thinking of going with FHA, you're not alone. This loan has allowed millions of people to buy a home since it came into effect during the 1930s. Keep this information and various tips in mind as you research the best mortgages for first-time home buyers.