Over the last several decades, FHA loans have continued to be among the most popular options for those looking to buy a home - especially first-time home buyers. These loans are government-backed mortgages that are insured by the Federal Housing Administration. While borrowers will pay for their own mortgage insurance, that insurance protects the lender from loss.
These loans often come with slightly higher interest rates, but they make it much easier for people to purchase a home if they have lower than average credit scores, smaller down payment amounts, and other factors that could make it more difficult to secure a loan. There are several key things to know about FHA loans. Here are seven of the most important ones.
1. You Don't Need Perfect Credit
Credit score minimums for FHA loans can be as low as 500 in some cases. However, it's important to note that higher credit scores can translate to lower interest rates, better terms, and less money down. In particular, those with a score of 500 to 579 will need at least 10 percent of the home's price as a down payment. Those with 580 or above will only need 3.5%.
2. The Minimum Down Payment
As mentioned above, if your credit score is at least 580, you can make a down payment of as little as 3.5% and get your loan. This money can be from your own savings or can include gifts from family members and in some cases may even come from grants from government programs.
Higher down payments could mean that your interest rate is lower, but just knowing that you don’t need as much money down is a key part of why FHA loans are so popular.
3. Lenders Must Meet Requirements
When you borrow in an FHA loan, you still have to go through a lender, not the US government. As such, lenders must be able to meet all requirements set forth of them by the government guidelines.
4. Your Closing Costs Could Be Included
FHA regulations allow loans to cover things like appraisals, credit report costs, title expenses, and other closing costs. Be aware that lenders often charge a higher interest rate on the loan if they cover your closing costs. Consider your options, but at least be aware that this is an actual option.
5. You Can Get Money For Repairs
There is a special FHA loan known as the 203K loan which covers not only the purchase price of your home but repairs and renovations. This is perfect for those who find that great 'fixer-upper' house and need additional money to get it in great shape. You could borrow up to $35,000 beyond the purchase price, just for home improvements.
6. There Are Two Parts To The Mortgage Insurance
FHA loans require two different types of mortgage insurance. These are:
•Upfront Premium - This is 1.75% of the total loan amount, and is paid as soon as you get the loan. It can also be financed as part of the loan itself.
•Annual Premium - This is generally paid monthly and varies depending on the total length of the loan, the loan amount, and the loan to value ratio.
These premiums are designed to protect the lender and are a major part of why FHA loans have been so successful. As such, you'll need to plan accordingly for them.
Keep these limits in mind as you shop for your home. And when you find that dream home and are ready for your FHA loan, our team is here and ready to help. Contact the Deb Klein Team today to get started on being a homeowner thanks to an FHA loan.