Are FHA Loans for First-Time Homebuyers a Good Idea?
Unlike their parents and grandparents, millennials are not jumping on the homeowner bandwagon anytime soon. Two contributing reasons why are:
- They have a lot of student loan debt to pay off.
- Their median credit score (640) is lower than that of the generations that came before them.
But there is a solution for them and anyone else feeling like home ownership is elusive: the FHA loan.
Let’s take a look at FHA loans for first-time homebuyers and how they can help people with limited funds purchase a home.
What is a FHA Loan?
FHA stands for the Federal Housing Administration. A FHA loan is a mortgage that is insured by this organization in case the borrower has to default on their loan. Basically, it’s a mortgage with added protection built-in for the lender.
A bank or other private lender issues the loan and if the borrower can’t repay it for whatever reason, the FHA will pay the lender.
Pros and Cons of FHA Loans for First-Time Homebuyers
A FHA loan allows someone to buy a home with a smaller down payment and lower credit score. Borrowers have to put down at least 3.5% of the property’s value if their credit score is at least 580. If it’s between 500 and 579, 10% or more is required.
This type of loan also allows you to use the money gifted to you by a relative for the down payment.
If the home you’re buying needs renovations or repairs, you may be able to take advantage of the FHA 203k program. This program allows you to borrow additional money along with your FHA loan to make fixes to the property.
Sounds great, doesn’t it? But there are some stipulations to keep in mind when using a FHA loan to buy a home. These are just a few FHA loan requirements:
- The lower the borrower’s credit score, the higher their interest rate will be
- Borrowers must have worked for the same employer for the past two years to qualify, or have had steady employment
- Borrowers must be legal U.S. citizens, have a Social Security number, and be of legal age to sign a mortgage in their state
- If the borrower previously declared bankruptcy, they must be two years out of it and have reestablished good credit
- The property the borrower is buying must be appraised by a FHA-approved appraiser
This type of loan also requires two types of mortgage insurance premiums:
Upfront mortgage insurance premium (UFMIP) – a one-time upfront monthly premium payment of 1.75% that has nothing to do with the borrower’s credit score. It may be paid upon closing of the property or included as part of the mortgage.
Annual MIP (charged monthly) – an annual premium or monthly charge that is calculated into the mortgage payment. The exact amount depends upon several factors such as the loan length, loan size, and loan-to-value ratio.
Contact Us About FHA Loans
If you’re interested in learning more about FHA loans for first-time homebuyers, contact us for a free quote or visit our site. We offer a free mortgage calculator and everything you need to know about securing a FHA loan.