If you are a first-time home buyer who is concerned about being able to qualify for a mortgage, you may want to consider an FHA mortgage.
What is an FHA Loan?
FHA loans are government-insured loans through the Federal Housing Administration although they are approved and administered by regular lenders that often offer conventional mortgages as well. Applying and being approved for an FHA loan will use a different set of criteria than a conventional mortgage, usually far more lenient.
For the lender, the added benefit of an FHA mortgage is that the government will insure it against a loss due to foreclosure. The benefit to the borrower is a smaller down payment requirement and the ease of qualification over a conventional mortgage. That being said, a home buyer needs to understand all the benefits as well as the drawbacks of an FHA loan.
The Benefits of FHA Mortgages
FHA loans are specifically designed for first-time home buyers who may not have enough money for a down payment or may not qualify for a regular conventional loan. There are a few important benefits of applying for an FHA insured mortgage.
- Low down payment — if your credit score meets or exceeds 580, you only need to come up with a down payment of 3.5%.
- Low credit score requirement — while the low threshold for a 3.5% mortgage is 580, with a 10% down payment, you can qualify with a credit score as low as 500.
- Lower interest rates — FHA mortgages offer a lower interest rate than conventional mortgages and offer fixed-rate loans that may not be available to higher risk borrowers.
- Option to finance closing costs — this enables a first-time home buyer with little available cash the option of rolling some of the closing costs into the financing instead of paying them all at once at closing. Closing costs do vary from lender to lender so some may not have the ability to be included in the financing.
Drawbacks to Consider
FHA loans can have numerous benefits for first-time homebuyers with little cash or with a less than stellar credit score but there are also some drawbacks that a borrower should be aware of before applying.
- Mandatory mortgage insurance throughout the life of the loan — because of the greater risk of some borrowers, lenders will require a mortgage insurance premium to offset the risk. With FHA, this is done in two ways. A single payment is due at closing which can be financed like other closing costs. The second is an annual premium based on the terms of the loan and paid with each monthly payment. Unlike conventional mortgage PMI, FHA mortgage insurance cannot be dropped at any point in the life of the loan.
- Strict appraisal standards — FHA eligibility requires certain things of the property being financed. It must be a primary residence and cannot be an investment home except for some specified multi-unit properties where the borrower will reside in one of the units. Although mobile and prefabricated homes can quality, many condominiums can’t.
Get Professional Assistance
If you are a first time home buyer in Stockton or anywhere in California, you may want to consider an FHA mortgage. Let the mortgage professionals at H.O.M.E. Lending show you how. Call us today at (209) 477-0262 and speak to one of our knowledgeable California FHA mortgage experts.