FHA Loans: Are They Suitable For You?

FHA loans are widely considered to be one of the best ways to make homebuying accessible to first time homebuyers. In this post, we will be discussing what are FHA loans, what are the requirements for FHA loans, and if it is suitable for you as a home buyer when looking for a home. So let us get started.

What are FHA loans? They are loans backed and insured by the Federal Housing Agency. It was established in 1934, during the great depression, when foreclosures and mortgage defaults were at a high. The program’s primary function back then was to get the support of banks and other lenders by insuring them to facilitate an improvement and relaxation in home financing. As a result, this program has primarily attracted first time homeowners, with low to moderate income and credit scores, who were out looking for homes. Since its inception 90 years ago, it has helped millions of Americans buy their first home.

If you are a first time homebuyer, this is a loan program you will want to consider.

• The main benefits of FHA loans are that they allow you to go as low as 3.5% down with credit scores as low as 580.
• Few important things to know, you will have to pay a two-part mortgage insurance that includes: a one-time upfront payment (1.75%) and an annual payment (.45-1.05%) to compensate for the increased risk. In most cases, homeowners with existing FHA loans refinance or replace their FHA loan once they hit 80% equity to remove their monthly mortgage insurance premium.
• Another point to know is that you must occupy this home as a primary residence. Meaning you must live in this house. It cannot be an investment property. There are ways to bypass this, but that can be a topic for a later post.

In conclusion, is this loan right for you as a first time home buyer? It depends on your financial situation. Is your credit score on the moderate to lower end? Do you have minimal cash for a down payment? If so, FHA is a suitable option. If you have the cash for a 20% conventional loan and your credit score is good it may be better to put the 20% down and avoid all the mortgage insurance. This may even be better for your cashflow. In the end, it all boils down to your financial picture.

* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.