A first-time home loan is an excellent time to explore the potential value of FHA loansfor most home buyers. Especially if you do not have a sizable amount of money saved up to present as a down payment on your home. In fact, 82 percent of FHA purchase loans go to first-time buyers, placing you in excellent company.
FHA Loans Pros and Cons
An FHA loan is a loan subsidized by the U.S. Federal Housing Administration. This government agency was created by the Department of Housing and Urban Development, known as HUD. The original intent was to encourage mortgage lending by banks reluctant to do so after the Great Depression. The government essentially guaranteed the loans, limiting the bank’s risks in lending.
Today, the program continues, encouraging lenders to extend mortgage loans to people with less than ideal circumstances, affording the dream of home ownership to more Americans in the following ways:
- Lower down payment requirements, as little as 3.5 percent.
- Reduced credit score requirements.
- Lower interest rates than conventional mortgage loans.
- Relaxed debt-to-income requirements (some lenders approve FHA mortgages to borrowers with up to 50 percent DTI).
- Ability to receive down payments as gifts up to 100 percent, conventional mortgages only allow a small portion of the down payment to be gifts..
- Loans are assumable.
- No penalties for prepayment.
- Applicants can have non-occupying co-borrowers or co-signers.
FHA loans do make the dream of home ownership possible for many, but there are a few considerations to keep in mind, including:
- Lower limits which limit buying power in high-cost markets.
- Disqualifies many lower cost homes in need of repairs or renovations.
- Higher private mortgage insurance (PMI) costs.
- PMI required regardless of down payment amount (conventional lending doesn’t require PMI if a 20 percent down payment is made).
- Much, much more paperwork.
- Must be owner occupied, meaning FHA loans are not allowable for investment properties.
Another huge benefit of FHA loans for first-time home buyers is the ability to qualify and use homebuyer programs for down payment assistance and government grants. There are many programs available that first-time buyers may qualify for making FHA loans an ideal choice if you’re buying your first home.
