The lack of affordable housing in the United States is a growing problem that has exacerbated greatly post-pandemic as home prices and interest rates rise. It’s even more difficult when low-to-moderate income homebuyers finally find the home of their dreams that’s within their price range and then struggle to come up with the down payment or secure a loan. However, one of the types of loans that we offer to help with this is an FHA Loan. These loans are instrumental in helping first-time homebuyers break into the market. We’ll explain how they work and how you can qualify in this article.
What is an FHA loan?
FHA loans are underwritten and administered through third-party mortgage lenders but backed by the government (the Federal Housing Administration). This simply means that the FHA protects your lender against loss if you default on your loan. FHA loans are great for low-moderate income and first-time homebuyers because they have less strict requirements than conventional loans. According to the FHA’s 2020 Annual Report, more than 83% of all FHA loans went to first-time homebuyers.
FHA loans are like conventional loans in that they are available in 15-year and 30-year terms with fixed interest rates. There are flexible underwriting standards that are designed to help give borrowers who might not qualify for private mortgages a chance to become homeowners.
What are the benefits of FHA loans?
As we mentioned earlier, FHA loans were designed to be inclusive and affordable. These benefits include:
- Low down payments — only 3.5% down required for credit scores 580+
- Flexible income and credit requirements
- Fixed- and adjustable-rate mortgages
- Loans for 1-4 unit properties and condos may be available
- Down payment funds can be a gift from a relative or employer*
- Home sellers can contribute up to 6% of the closing costs
*Subject to underwriting review and approval.
Are there any downsides?
All good things do come with a price, and in the case of FHA loans, the price comes in the form of mortgage insurance. There are two types of insurance premiums:
- Upfront mortgage insurance premium.
This is what you will pay upon closing your loan. The amount will be 1.75% of the loan amount, and the premium can be rolled into the financed loan amount.
- Annual mortgage insurance premium.
The annual mortgage insurance premium is paid monthly, and will be 0.45% for a 15-year loan and 1.05% for a 30-year loan. However, if you pay at least 10% down, the mortgage insurance premium drops after 11 years.
Is an FHA loan right for me?
If you’re a first time homebuyer or have been struggling to get pre-approved for a conventional loan, an FHA loan might be a good option for you. We recommend reaching out to one of our experienced loan officers today. We will tell you about all of our loan options and decide which one is the best choice for your circumstances.