FHA loans are a popular choice for a lot of people, especially first time homebuyers. Why especially so for first time homebuyers? FHA loans require a low down payment, just 3.5% of the sales price. It’s easier for first timers to come up with enough money for a down payment and for closing costs. Plus, sellers can help out with the closing costs as well, further adding to potential cash savings. Down payments can also come in the form of a gift from a family member or qualified non-profit. While conventional loans also allow for down payment assistance, they require a minimum amount from the buyers.
FHA loans in general are easier to qualify for as well. Debt to income ratios are relaxed, especially when compared to low down payment conventional programs. That means having the ability to comfortably afford a slightly higher loan amount. FHA loans are available from most every single mortgage company and mortgage broker, too.
FHA loans also more easily allow for a coborrower to help out. If someone is buying a home but the payments are a bit out of reach, FHA programs allow for a co-signer to help relax debt ratios to a qualifying level. It should be noted here that a co-signer will have to qualify for the new mortgage as well as any current debt. This could very likely mean the co-signer would be responsible for two mortgages. The one they have now plus the new FHA loan.They must also qualify based upon credit scores. If there are multiple people agreeing to take on a new home loan, lenders will request credit scores and use the lower one of the group.
Lenders like FHA loans as well. As long as the lender uses appropriate FHA guidelines when evaluating and approving a mortgage, the loan carries a guarantee to the lender. Should the loan ever go into default, the lender is then compensated for the loss. This guarantee is financed with two different forms of a mortgage insurance policy. There is an upfront insurance premium that is rolled into the loan amount and there is an annual premium that is paid in monthly installments, included with the monthly mortgage payment, insurance and property taxes.
FHA loans are not for investment properties, but available for owner occupied units. This means financing for a rental property or second home is not available. Conventional loans can be used for non owner occupied units, but not FHA loans. There are also loan limits for FHA loans and these limits can vary based upon location. FHA loan limits are based as a percentage of the median home price for the area in which the property is located.
However, for most first time homebuyers, FHA mortgages are the loan of choice. Low down payment, easier qualifying, relaxed debt ratios and credit make these programs ideal for many first time homebuyers.