FHA Loans: Offering Opportunities for First Time Buyers

by Karen Lawson
April 12th, 2010

As the federal tax incentive program for homebuyers approaches its April 30 deadline, and concerns mount over rising interest rates,  FHA mortgage loans  continue offering first time buyers opportunities not available with conventional home loans.

Getting Your Foot in the Door: The Role of Cash and Credit

In order to qualify for most conventional mortgage loans, you’ll need a down payment of at least 20% of your new home’s purchase price, or for refinancing, you’ll need to have sufficient home equity. with falling home values and tighter credit requirements, an FHA home loan can provide the flexibility needed by first time buyers or homeowners with little home equity. 

FHA Mortgage Loans: Low Down Payments and Alternative Credit

Coming up with 20% down can be challenging when you don’t have an existing home to sell. Once you acquire your first home, it’s typically easier to move on or move up. FHA currently allows a minimum down payment of 3.5%, and FHA guidelines permit cash gifts from family and friends as a source of your down payment. Your benefactors will have to provide documentation that they are giving you a specific amount of cash as a gift, with no expectations of being repaid.

FHA approved lenders can evaluate your credit using rent and utility receipts in place of credit card and loan payments. Consult HUD approved lenders or housing counselors for details.

FHA Allows Options for Handling Closing Costs

Closing costs can add a significant amount to the cost of buying or refinancing a home: FHA allows three alternative methods for paying closing costs if you can’t pay them up front:

  • Seller contributions: FHA recently reduced allowable seller contributions to buyer’s costs from 6% to 3%, but seller contributions can help take the edge off of paying closing costs up front.
  • Adding costs to mortgage amount: You may also be able to roll some or all of your closing costs into your mortgage amount. Keep in mind that this raises your mortgage debt and monthly payment amount, but it can make the difference between owning your own place or paying your landlord’s mortgage.
  • Lender pays closing costs: FHA guidelines  permit mortgage lenders to advance payment of closing costs in exchange for higher mortgage rates. If you’re considering this option, it’s important to do the math and estimate how much a higher mortgage rate will cost over time.

Credit Problems: You May Qualify for an FHA Home Loan

FHA loan requirements are more lenient than conventional lending requirements, but if you’ve had credit problems, it’s important to fully understand FHA credit requirements and the “big picture” of buying and maintaining a home. HUD approved housing counselors can help with budgeting and navigating the FHA loan process.  

FHA loan programs offer first time and moderate income buyers opportunities for owing homes when it would otherwise be unlikely.

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