If apartment living is getting old, or you've outgrown your parents' basement and house rules, you may be thinking about buying your own place. But if you're like many first-time homebuyers, you may not have a lot of money in the bank or have a strong credit history or a decent credit score. For this reason, you may be interested in learning about home loans that offer low and no-down payment options and have flexible lending requirements. One of these is the FHA loan. Let's take a closer look.
How it works
An FHA loan is a government-backed mortgage insured by the Federal Housing Administration. The Federal Housing Administration does not actually issue mortgage loans. Instead, it provides mortgage insurance to lenders like Amerifirst Home Mortgage and repays the lender if the borrower should default on the loan. To fund that obligation, the FHA charges borrowers (you) a fee.
Despite the fee, an FHA loan is still an attractive loan for individuals and families with low-to-moderate income levels for the following reasons:
- Low down payment requirement (as low as 3.5%)
- Closing costs typically run lower as compared to a conventional loan
- Seller of the house can contribute up to 6% of the sale price to help cover closing costs. Gift funds are also allowed to cover closing costs.
- Credit score requirements also tend to be a bit lower than other mortgage loan programs
- Debt-to-income ratios differ from other options as well - the general rule for FHA is that your house payment should not exceed 31% of your income. Adding your house payment to the rest of your debt should keep your total debt at or below 43% of your income. Higher ratios may be considered with compensating factors.
- No income limit and no geographic restrictions
- This is also a good loan if you do not have a long credit history as non-traditional forms of credit are accepted
Take Note: Remember that fee we mentioned earlier? In exchange for the flexible lending requirements that help you secure the loan and buy a home, you'll be required to pay an up-front mortgage fee and and a monthly mortgage insurance fee, both of which can be included in your monthly mortgage payment.
Eligible Property Types
You can use an FHA loan to buy an existing home or build a new one. FHA-eligible property types include approved condos, modular homes and manufactured homes with pre-approval. The home must be your primary residence.
Remodel your home
You can use a special FHA 203(k) loan to buy a fixer-upper and pay for the home improvements by rolling the cost of the remodeling work into the home loan. This is a type of renovation loan that allows you to close on a home that doesn’t meet FHA requirements, with the plan in place to make the necessary repairs to that home. You can also use the 203(k) to refinance your current mortgage and make improvements to your current home.
Loan Options Guide
In this 20-page guide you’ll find solutions to problems for first time home buyers with little or no down payment. Download your copy at the button below and get started on your first-time home buyer adventure. Maybe you'll end up leaning towards an FHA loan. Maybe you'll choose a USDA Rural Development loan. Maybe it's another option that's right for you. The guide below will help you narrow your focus.