As a first-time buyer, you may be feeling overwhelmed with the process. You have probably been researching your options and narrowing down what type of loan would work best for you. There are many different loans available to choose from, but if you're asking yourself "What is an FHA Loan?" then this blog post is for you! In this article, we will discuss what FHA Loans are and why an FHA loan is the best choice for first-time homebuyers.
First Time Buyer Limitations
FHA loans are your best choice as a first-time homebuyer because they address potential limitations. As a first-time homebuyer, you may have some natural constraints, such as a lower credit score or limited funds for a down payment. These can make it harder to qualify for loans with competitive interest rates.
An FHA loan is a perfect solution. The Federal Housing Administration (FHA) acts as your lender, which is why these loans are considered “government-backed.” As the lender, the FHA has a bigger support network and is less concerned about recovering its assets in case of a default. Essentially, this allows you to shop around for better mortgage rates but still benefit from reduced closing costs by using one single point of contact (a private lending company and loan officer) throughout the process.
Low Down Payments
Low down payments are a cornerstone of FHA loans, and part of what makes them so attractive to first-time buyers. Depending on your credit score and the purchase price of the home, you may be able to put down even less than you expect. With an FHA loan, the very lowest down payment is just three and a half percent.
The FHA allows borrowers with little cash for a down payment to still qualify and buy a home in today's competitive market. Homeownership is an important part of building wealth, so this type of loan can help you get on track towards future financial stability. All with a very low upfront cash cost!
The FHA also has more lenient credit score requirements for their loans compared to other programs available. First-time homebuyers are often young people who have had less time to build their credit scores. With an FHA loan, you only need a credit score of 580 to qualify. However, even with a score as low as 500, you may still qualify for a loan.
Thus, an FHA loan is the best choice for first-time home buyers. These flexible requirements allow borrowers with few financial resources the opportunity to buy their own homes and start building credit and equity right away!
Debt to Income Ratio
Another reason an FHA loan is the best choice for first-time homebuyers is because of the allowance for higher debt levels. There are limits on the debt you can carry when qualifying for a mortgage, but the FHA gives you a lot of flexibility.
For most FHA loans for first-time home buyers, your total monthly housing expenses (mortgage payments + insurance) cannot exceed 31% of your gross income. Additionally, all debts combined must not be greater than 43%. With the FHA, you may even qualify for a mortgage with a DTI as high as 50%.
Competitive Interest Rates
Interest rates have been dropping over the past few years. However, borrowers with lower credit scores or smaller down payments tend to pay higher interest rates than those who have perfect credit and put more money down when buying a house. Luckily, FHA loans still offer competitive rates for first-time homebuyers.
An FHA loan is a mortgage insured by the Federal Housing Administration. Thus, FHA insurance protects mortgage lenders, allowing them to offer loans with lower interest rates. So while the FHA does not set the interest rate, they can still often offer better options than what the market would otherwise dictate.
Do I Qualify for an FHA Loan?
FHA loans are designed to help low to moderate-income homebuyers with lower credit scores achieve homeownership. Thus, to qualify, you must have a steady history of employment and limited debt compared to income. However, first-time homebuyers should be aware that even if you have less than perfect credit, it is still likely that you will qualify for an FHA loan. These odds increase if you can use a co-borrower.
How Much Can I Borrow?
The amount you can borrow for your loan depends a lot on where you live and what the housing market looks like. The FHA loan limits for 2021 range from $356,362 on the low end up to $822,375. The specific amounts vary by county.
How Do I Know If an FHA Loan Is the Best Choice For Me?
An FHA loan is the right choice for you if you have less-than-perfect credit, less cash for a down payment, and your goal is to purchase a home in the $275,000 - 625,000 price range. If this sounds like you, then it's time to get started! Our experienced team at Texas United Mortgage is well-versed in FHA loans. We are ready to help guide you through every step of the home buying process. Reach out today to find out how much you qualify for!