For affordable home buying, government-insured mortgages like the FHA or Federal Housing Administration loans are your best bet. However, you must make a thorough comparison of the various loan options to understand the intricacies of each kind of mortgage loans. To understand the various aspects of mortgage loans and how it influences your budget, you must use a mortgage calculator that is available online. The calculator allows you to experiment with different loan conditions by varying the elements of interest, repayment period, down payment, etc. so that you can see in front of you how the numbers would look like. It becomes easy to identify the differences between the mortgage loans quickly and choose one that is most appropriate for you.
Since FHA loans have relaxed eligibility criteria like minimum down payment and moderate credit score, it is a perfect option for first time home buyers. Downpayment of 10% and having a credit score as low as 500 could help you to get the loan. However, to obtain maximum financing, your FICO score must be more than 580 that would entail 3.5% down payment. Lenders too are comfortable with FHA loans due to the insurance coverage taken by borrowers that protect them from losses in the event borrowers defaulting with payment.
Conditions attached to FHA loan
- The loan is only for a primary residence, and an FHA approved appraiser must do the property appraisal confirming that it meets the HUD guidelines.
- Stability of income is one of the primary considerations of lenders and borrowers must have a steady employment history not less than 2 years of continuous working with the same employer. Moreover, the income should be verifiable through tax returns, pay stubs and bank statements.
- Your front-end debt ratio consisting of debt payments except mortgage payment must not be more than 31% of your gross monthly income which might go up to 40% depending on lenders. And the back-end debt ratio that includes all debts plus mortgage payments must not exceed 43% of your gross monthly income which can go up to 50% at the discretion of the lender.
- Waiting time is 2 years to apply for a loan for those who have gone through bankruptcy and those who experience foreclosure must wait for 3 years before they can apply for a loan. But it is essential to create a positive credit history before applying for a loan.
Don’t worry about credit score
Credit scores can go wrong for many reasons, and it will not be right to undermine the eligibility of borrowers with not so good credit score. This appears to the guiding principle of FHA loans that allow people with below-average credit score (considering FICO score 620 as the benchmark) to qualify for a loan. However, a credit score below 500 can make things tough for borrowers although there is some wriggle room as FHA does make exceptions sometimes to include persons with insufficient credit or unusual credit history. Your credit history is not only crucial for eligibility for a loan but also influences the amount of down payment. Having a credit score of 580 would help you get a loan with 3.5% down payment. For down payment assistance, you can use a government grant, a financial gift from a family member or your savings.
Closing costs of FHA loans
The Housing and Urban Development (HUD) has put a cap on the closing charges that FHA lenders can apply on loans which range between 3% and 5% of the loan amount. Besides the loan amount that determines the closing cost the state to which the property belongs also influences it. In addition, whether you pay points to lower the interest is also a consideration. There is the scope of home sellers, lenders and builders to bear a part of the closing costs such as title expenses, credit report, and appraisal. Typically, real estate marketers use it as an incentive for home buyers to improve their business.
Private mortgage insurance for FHA loan
The higher is the borrower’s stake less would be the risk of lenders which is why anyone paying less than 20% down payment must take the cover of private mortgage insurance to protect the lender in case of default in making payment. Borrowers must pay two mortgage premiums for FHA loans – upfront mortgage insurance premium and annual mortgage insurance premium.
The borrower must pay 1.75% of the loan amount towards upfront mortgage insurance premium at the time of getting a loan, and it can be included in the loan amount. The premium for annual mortgage insurance can vary from 0.45% for loan tenure of 15 years to maximum 1.05% for a loan term of 30 years and takes into account other factors like the loan amount and LTV or initial loan to value ratio. The premium is payable monthly.
Look for an FHA lender
Remember that it is not the FHA’s business to give loans but it only ensures the loan and there are approved FHA lenders who actually give loans. It means that you must do some shopping even if you have decided to take the FHA loan because all loans are not equal in the rate of interest and other terms and conditions. The same amount of loan may cost different from different lenders. Banks and credit unions across the country offer FHA loans, and you can even find some individual mortgage lenders as well as community banks ready to give FHA loans. Besides the cost of the loan, the quality of services varies among lenders, and you must compare the offers in totality instead of just focusing on numbers.
Those who have less than ideal credit that bars them from availing conventional loans and people who do not have enough saving to make a sizeable down payment are the best candidates for FHA loans. Those belonging to low to moderate income groups who are also the first time home buyers would find FHA loans very attractive as if created just for them. As long as buyers, even if they are repeat buyers, can show that they are buying a primary residence, they can avail FHA loan.