If this is your first time purchasing a home, you might not be aware that there are actually several different types of home loans. One of the most popular for first-time homebuyers is the FHA (Federal Housing Administration) loan because it offers several benefits that other loans don’t have, but in order to qualify and get approved for this kind of loan you and your potential property have to meet certain qualifications.
In order to qualify for an FHA loan, you must be purchasing a single family home or a multi-family housing that is within the United States or its territories. The FHA has been providing loans for these types of properties since it was first created in 1934.
There was a time when many homeowners could get approved for a loan with little or no down payment, but after the housing market crashed in the late-2000s (at the beginning of the Great Recession), many lenders stopped offering these types of loans. If you want to get a conventional loan today you will need to have at least 10 percent of the price of the home available in cash for a down payment and most lenders prefer if you have 20 percent. Unless you recently sold a home and have some income from the sale, you might have a hard time coming up with that much cash. In that case you should talk to your lender about FHA loans, since buyers are only required to have 3.5 percent of the purchase price in a down payment. On a $250,000 home that is the difference between putting down $25,000-$50,000 (10-20%) or $8,750 (3.5%).
Homebuyers who get an FHA loan and put down less than 20 percent will have to pay private mortgage insurance (PMI). This is designed to protect lenders against losses that might result from a homeowner who defaults on the loan and has no equity in the home. You may be able to get rid of the PMI when you have at least 20 percent equity in the home, either because home values increase, your principal balance decreases, or both. If you cannot remove the PMI when you have 20 percent equity in the home, talk to your lender about refinancing into a different kind of loan.
Loan & Debt Limits
There are some limits on the size of loans that are eligible for FHA mortgages. These limits are based on the type of housing, as well as the state and county in which you are planning to purchase a home. FHA lenders will also evaluate homebuyers’ debt-to-income ratios to ensure that they are purchasing a home they can afford to make payments on and are not getting into a home loan they will likely default on. To find out what these limits and ratios are, talk to your Salt Lake City mortgage lender today.
As with any home loan, buyers must have a certain minimum credit score to qualify. Your credit score is a number that reflects your history of payments to creditors, and is used by lenders to evaluate the likelihood that you will pay back your loan. If you have questions about your credit score and how it might affect your qualification for a loan, talk to your lender today.
Generally speaking, FHA loans are easier to qualify for, they offer competitive interest rates, fees are lower, and you can get these loans even if you have bankruptcy or foreclosure in your past or you don’t have a long credit history. Find out more about FHA loans at City Creek Mortgage today.