For First Time Buyers, Take a Look at the FHA Program
One of the biggest hurdles first time buyers face is saving up enough money for a down payment and closing costs. Unless someone is eligible for a no-down payment VA loan or the property is located in a rural area and eligible for USDA financing, there will need to be a down payment in order to secure financing. But there is a consistent myth out there that someone needs to save up for a 20 percent down payment in order to qualify for a mortgage. While that is true when someone wants a conventional mortgage without any monthly mortgage insurance payment, that’s not the case for all mortgages.
The Federal Housing Administration introduced the FHA loan program back in 1934 which for the first time provided universal lending standards banks could use when evaluating a loan application. Prior to then, minimum down payment requirements could be as high as 30 or 40 percent of the sales price. That alone kept many out of home ownership. Today however, the minimum down payment for an FHA loan is just 3.5% of the sales price, not 20 or 30 percent. In addition, borrowers can have the needed funds for a down payment and closing costs come in the form of a financial gift from a family member or qualified non-profit organization.
FHA loans come in both fixed rate and variable rate terms, giving home buyers a choice in mortgage programs. FHA loans are also a bit more forgiving as it relates to qualifying. For someone with a credit score of say 600, FHA loans are more lenient compared to low down payment conventional loans with a 600 score. FHA loans also come with an inherent guarantee to the lender. Should the loan ever go into default, the lender is compensated for the loss.
If you’re thinking of buying your first home and want to come to the closing table with as little cash to close as possible, the FHA loan just might be your ideal choice.