Buying your first home can be exciting and overwhelming, especially if you have never financed a large purchase before. As a first time home buyer it can be hard to know which loans are right for you. It’s important to consider an FHA Loan as a First Time Home Buyer.
FHA loans are specially designed to help buyers without the credit history needed to qualify for a conventional mortgage. FHA loans can also help out buyers who are unbale to meet the down payment requirements on conventional loans.
The Federal Housing Administration insures FHA loans. The loans are managed by various FHA-approved lenders.
These programs make homeownership more accessible to those with low to mid-average incomes.
If you qualify you will be eligible for various benefits associated with an FHA loan.
For example, most mortgage products have don’t have options for down payments lower than 5 percent. In comparison, an FHA-backed mortgage offers low down payments as small as 3.5% of the purchase price.
FHA loans also provide the opportunity to buy a home for those with less than perfect credit. Conventional mortgage lenders prefer a credit score of 700 or higher to for the best rates.
With an FHA product, borrowers can have scores as low as 580 and still qualify for a 3.5% down payment. They may even accept a credit score as low as 500 with a 10% down payment depending on the lender.
FHA loans also make it easier for those with no established credit score to purchase a home. If you’re a first time home buyer in Texas with no credit score, the FHA loan may be a good option for you.
FHA loans are also beneficial for those with a high DTI or debt-to-income ratio.
This ratio compares how much money you make with how much outstanding debt you have. The DTI ratio determines whether you’ll be able to meet your mortgage payments each month.
If you have a good credit score or can put down a higher down payment, you may still qualify for FHA loans with a DTI of as much as 50%.
Like any mortgage product, there are some downsides to choosing an FHA loan.
The first of these drawbacks is mortgage insurance. With more traditional loan products, you can avoid additional loan insurance costs by putting down at least 20%. As most FHA-backed buyers opt for smaller down payments, FHA loans require an insurance premium of 1.75% of the loan amount.
You can roll this cost into your loan, but that also means you’ll be paying interest on the premium. You’ll also pay an additional monthly premium depending on the loan amount and the size of your down payment.
Another disadvantage of FHA loans is that they limit the types of properties you can consider. FHA loans have more stringent inspection requirements.
If you plan on buying a “fixer-upper,” the property may not qualify for an FHA Loan.
If you’re in an area with an accelerated seller’s market, FHA loans may put you at a disadvantage.
While an FHA-backed mortgage is just as dependable as a conventional mortgage, sellers may not want to undergo the stricter appraisal requirements. If they can sell to another buyer with less stringent requirements for mortgage approval, they may opt to accept an offer from a different bidder.
Applying for FHA loans is similar to applying for more traditional loan products.
The first step is gathering all the documentation about your finances that you’ll include as part of your application. These documents include pay stubs, W2s, tax returns for the last two years, information on any investments you have, bank statements, and a list of all your current debts.
Another essential part of your application is your credit report.
It’s highly recommended you use one of the many online services that provide your credit reports for free before applying. These services will allow you to pull your report, often along with an estimated credit score, before your lender does.
Knowing your credit score before applying allows you to correct any inconsistencies. This means you can enter the pre approval process with a higher credit score.
While the FHA backs loans, it’s lenders that provide the actual loan services.
When you have gathered your financial information, you can apply with any lender or bank that is approved by the FHA for preapproval.