Written by Carissa Abazia
Sales of new single-family houses in the United States jumped 6.7 percent from June of 2018 to a seasonally adjusted annual rate of 689 thousand in May of 2018, following an upwardly revised 3.7 percent fall in April. It is the highest rate since November, beating market expectations of a 0.7 percent increase. Sales in the South hit their highest level in nearly 11 years. New Home Sales in the United States averaged 650.83 Thousand from 1963 until 2018, reaching an all time high of 1389 Thousand in July of 2005 and a record low of 270 Thousand in February of 2011.
That number proves that home ownership is still synonymous with many U.S. citizens’ idea of the “American Dream.” While home buying can be one of the biggest and best life moments – an incredible, validating experience – it can also be difficult. As a mortgage advisor, I can personally attest to this spectrum as I have experienced very complicated, difficult loans as well as loans that did not present any raod bumps and close within thirteen days.
One of the biggest misconceptions is that many people are unaware of loan programs that do not require at least 20 percent down.
Fortunately, for potential home-buyers who don’t have large amounts of cash or gifts available to them, there are several home financing options that might work well for them. These programs include USDA (100% financing), GSFA (grant program), Freddie Mac’s and Fannie Mae’s 3 percent down programs, and the well-known 3.5 percent down program offered by the Federal Housing Administration (FHA).
In this post, I’m going to focus on FHA loans. Below, I’ve compiled a list of five FHA loan facts to help answer frequently asked questions and help you decide if pursuing an FHA loan is right for you.
*I will touch on the other low/no down payment loan programs in a future post*
1. FHA loans only require 3.5 percent down
Pursuing an FHA loan substantially reduces the amount you’ll need to bring to the table in the way of a down payment. FHA loans allow you to put as little as 3.5% down.
2. Credit requirements for FHA loans are lenient
Many loan programs will require good (if not excellent) credit to qualify for a loan with a decent rate. After all, the costs associated with most home purchases put a lot of liability on lenders. Credit scores are one of the main ways they mitigate their risk.
With FHA loans, you can expect leniency with your credit score. To qualify for a 3.5 down payment, applicants need a score of 580 or better.
3. Expect to pay PMI
Private Mortgage Insurance (PMI) protects lenders against buyers who end up defaulting on their home loan. PMI is not required for buyers who have over 20% equity in their home. Given that, with FHA loans, you’ll have to budget for PMI expenses.
The cost for PMI will vary based on your home’s value and your credit score. Typically with a lower credit score, the rate is much better with FHA as compared to a conventional loan (Freddie Mac or Fannie Mae). The Federal Housing Administration requires all FHA mortgages to have MIP regardless of how much money is used as a down payment.
The good news that your mortgage advisor can help you improve your credit score and financial scorecard so that you can eventually refinance into a conventional loan once you’ve paid down your mortgage to the point that you’ve acquired 20% of your home.
4. FHA loans need to come from FHA-approved lenders
FHA loans are offered through a variety of lending institutions. In order to make sure you’re getting a legitimate FHA loan, however, your loan provider needs to be FHA-approved.
Remember, the FHA is not a lender. You cannot borrow money directly from the FHA. The FHA is an insurer that enables lenders to offer favorable loan terms on the promise that, if things go wrong, the FHA will help lenders pick up the pieces.
5. FHA loans are only available for homes within a certain price range
The FHA changes the home purchase prices they’re willing to insure on a yearly basis. These prices fluctuate based on home values in a given area during a given year.
What that means is that the FHA products available in Nebraska will be different than those offered in California. Some states, like Hawaii and Alaska, get additional special considerations due to the more complex costs associated with construction in those areas.
As a quick reference, the FHA Loan Limits for homes in California as of 2018 can be found here.
Wrapping Up FHA Loan Facts
More and more, people in the United States are looking to become homeowners. To that end, FHA loans offer buyers flexible means to purchase a house. This flexibility extends to down payment amounts, closing costs and credit requirements.
If you’re interested in an FHA loan after reading the above facts, be sure to use all the resources to your advantage. Ask your local and trusted mortgage advisor if they are a FHA approved lender and engage multiple conversations to get the best possible rate and scenario.
Thanks for reading!