What First-Time Buyers Should Know About FHA Loans

As a first time home buyer, you're likely to hear a lot of discussion about FHA loans. FHA loans help many first time home buyers get the home they want at a rate they can afford. Understanding the way FHA home loans work and how FHA may help you is an important part of getting a loan that will work for your needs.

Make sure to discuss all options with your lender to understand what will work best for your home buying situation.

What is FHA?

An FHA loan is a loan that's insured by the Federal Housing Administration. In fact, this can be a source of confusion for many home buyers: FHA is not a bank or a lender. FHA lenders are simply lenders who are approved to provide FHA loans to home buyers.

Benefits of FHA Loans

There are many reasons that first time home buyers turn to FHA loans for their first house. Some benefits of FHA loans include:

• Low down payment. FHA loans can accept down payments as low as 3.5 percent of the purchase price of the house. This means that first time home buyers without a lot of cash on hand can still consider buying a home – perhaps even a listing in an attractive community like Rialto. While many borrowers use their own savings to make the down payment, FHA borrowers can also get a gift from a family member or a state or local government grant for the down payment.
• Lenient credit requirements. Borrowers with credit scores between 500 and 579 can still qualify for an FHA loan, provided that they can put down 10 percent for a down payment. Borrowers with a credit score of 580 and higher will qualify for the lower down payment of 3.5 percent.
• Sellers can pay closing costs. FHA allows the seller or even the lender to pay the closing costs. This can be a big bonus for home buyers with limited resources.

These features are a major attraction for many first time home buyers who may have a small savings, rocky credit history or a short credit history.

Cons of FHA Loans

The great benefits of FHA loans are not without a few drawbacks, although many home buyers find these caveats to be worth the tradeoff.

• Mortgage insurance. Buyers must pay a two-part mortgage insurance when they make a purchase with an FHA loan. Upfront, buyers must pay a premium of 1.75 percent of the loan. These costs can be wrapped into the loan itself. In addition, home buyers must pay an annual premium that falls between 0.45 percent and 0.85 percent of the loan itself. This annual premium is paid monthly and varies depending on the length of the loan and the loan amount.
• Only FHA-approved lenders. FHA lenders must be FHA approved. Fortunately, many lenders are FHA approved and finding a reputable lender should not be hard for many borrowers.
• Minimum property standards. Homes financed with FHA insured loans must meet minimum property standards. More specifically, any home purchased with an FHA home loan must protect the safety and security of the occupants. In addition, the home cannot have structural deficiencies. Minor problems like cosmetic issues, faucet leaks and cracked window glass are not considered problematic. However, problems like frayed and exposed wires, roof leaks and soil contamination can all prevent an FHA loan from going through. Problems with homes must be remedied before the home can be purchased.

While these requirements can be an inconvenience for some home buyers, FHA standards help protect home buyers. These standards also ensure that FHA loans can be made available to home buyers who might otherwise struggle to get financing.

Getting an FHA Loan

In order to get an FHA loan, a home buyer must first find an FHA approved lender. Different lenders will have different requirements and can even have different interest rates. Home buyers who would like to buy a home with an FHA loan must shop around to get the best deal.

While interviewing lenders, inquire about rates, fees and what to expect during the loan process. Find a lender who can communicate clearly about the borrowing process and who can answer all your questions to your satisfaction.

Don't Have a Lender? Talk to Your Real Estate Professional

Many real estate professionals can recommend reputable lenders to buyers. If you're not sure whether or not an FHA loan is right for you, and you would like to talk to a lender, contact your real estate professional. He or she can connect you to a lender who can help you get started.