For many people, one of the biggest obstacles to buying their first home is saving for the down payment typically required by the financial institution that will provide the loan for the property purchase, known as a mortgage.
In most cases, with conventional loans, buyers are advised to make a down payment of at least 20% of the purchase price, the minimum required to avoid paying for mortgage insurance.
In the current economic scenario of high inflation and interest rates, which have made mortgages very expensive, many potential buyers end up leaving the market or seeking another type of financing specifically designed for buyers who are purchasing their first home or who have not owned one for at least three years.
These loans, called ‘FHA loans’, are insured by the Federal Housing Administration, an agency that is part of the U.S. Department of Housing and Urban Development. In this type of loan, the federal government protects lenders against losses. That is, if a homeowner fails to pay their mortgage, lenders will be reimbursed by the government. Since lenders take on less risk, they can offer loans to buyers considered higher risk, meaning those who do not have a strong credit history or do not have a 20% down payment.
However, to qualify for this type of loan, you will have to meet some requirements.
1) If you have a credit score of at least 580, you will need to make a 3.5% down payment. But if your credit score is between 500 and 579, you will need to make a 10% down payment.
2) Remember the mortgage insurance mentioned earlier? FHA loans come with their own version, called ‘MIP’. If you put down at least 10%, you will pay this insurance for 11 years. If you put down less than that, you will have to pay this insurance for the entire duration of the loan. In early 2023, the Federal Housing Administration reduced the MIP rate from 0.85% to 0.55% annually.
3) Two generally stressful parts of the home buying process are the appraisal and inspection of the desired property. An appraisal is when the home you hope to buy is evaluated by a professional to determine its value. This can affect loan approval. Appraisals are not always required in a conventional loan, but in an FHA loan, they are generally required.
4) The same goes for the inspection. While in a conventional loan the inspection is optional, it is necessary for an FHA loan, which primarily concerns whether the property is a safe place to live. The appraisal requirements are strict, which can make it difficult to get FHA loan approval.
Finally, it is worth noting that sellers are sometimes reluctant to accept sales with FHA loans.
Data collected in 2021 by the National Association of Realtors found that only 30% of surveyed sellers would likely accept offers from buyers using FHA loans. The stricter requirements for loan approval were likely the reason sellers were hesitant to accept these offers.
FHA loans can be an excellent way to finance the purchase of your first home, but there are some downsides to consider when you are looking for different types of loans and lenders.
Source: The Accent