Are you considering buying a home, or have parents that are looking to help you buy a home? In today’s market, the Federal Housing Administration (FHA) loans are one of the most popular types of loans, especially for first-time home buyers. Despite a negative stigma from prior years, FHA loans serve as a great way to get first-time buyers, and even non-first-time homebuyers, into their home of choice. FHA is not a lender, but a government agency that insures loans so that mortgage brokers and banks can offer these special programs to their borrowers.
Mortgage Less Than Rent?
With interest rates so low, your mortgage could be less than what you are paying in rent. So many young people are looking to get into the market right now, but may not know the restrictions that are in place. Conventional financing is one way to go, but if you don’t have 20% to put down, owning a home may seem like a distant dream. An FHA loan is a great option for somebody in this situation, for the first time homebuyer, who is not looking to put a lot of money down.
One if the biggest advantages that FHA loans give is the ability to offer a low down payment alternative. With just 3.5% down, buyers are able to purchase a home without having to drain their bank accounts.
Not only do they require a smaller down payment, but their guidelines are more lenient as well. Their debt ratio requirements are less strict and their credit score requirements are better as well. FHA offers competitive rates that are even transferable. This means that when a borrower decides to sell their home, their rate and term can be transferred to the new buyer. Interest rates are currently at record lows, so the ability to transfer today’s lower rate to a buyer, when interest rates jump up, is valuable and could help your home sell quickly.
The downside of an FHA loan is that the borrower is required to pay mortgage insurance, because they are borrowing more than 80% of the value of the home. Mortgage insurance costs a little over 1% of the purchase price, however, this figure does change from time to time.
FHA Cheat Sheet
- Home loans that are insured by the Federal Housing Administration
- FHA is not a lender
- Program established in 1934 to make it easier for people with little money down, less-than-perfect credit, and first time homebuyers
- Mortgage insurance is required
Why FHA is attractive to you:
- Low down payments (only 3.5% required)
- Cash reserves not needed on 1-2 unit properties
- Non-traditional credit accepted
- Great rates!
- Easier to qualify with flexible guidelines
- Assumable (this means that when an FHA borrower is ready to sell, the existing loan can be taken over by the new buyer- this is especially attractive when rates go up)
- Non-occupying co-borrower IS allowed
To learn more about how FHA may be right for you, visit www.hud.gov.
Lauren McKinney, MBA Candidate '12
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