Florida buyers are surprised to learn the FHA loan was introduced back in 1934 and still the top mortgage program for those purchasing their first home. And while FHA is not reserved only for first time home buyers there are some reasons why it’s a good deal for those wanting to come to the closing table with as little cash as possible.
The FHA loan is one of the three government-guaranteed mortgage loans. The other two are the VA home loan and USDA program. Both require no money down but do have restrictions on who can take advantage of either program. VA loans are reserved for armed forces veterans, active duty personnel with 181 days of service, National Guard and Armed Forces reserves with at least six years served and un-remarried spouses of veterans who died while in service or as a result of a service-related injury. USDA loans can only be used in approved areas and there are income limitations for the borrowers as well. With the FHA loan, while there is a down payment requirement, there are no such restrictions.
FHA loans require just 3.5 percent down and that is one of the main reasons first timer buyers are drawn to the program. It simply doesn’t take as much to save for a down payment and closing costs. On a $100,000 purchase, the down payment is only $3,500. FHA loans also accept grants from approved sources that can help with the down payment and closing costs. A financial gift from a relative can also be used to cover the down payment and closing costs entirely with the borrowers only required to have at least $500 in the transaction. Conventional loans aren’t as accommodating as they relate to gifts and minimum borrower contributions.
FHA loans do carry a government guarantee in favor of the lender. Should the FHA loan ever go into default and the lender that approved the loan followed proper FHA guidelines when issuing the approval, the lender is compensated for the loss. This guarantee is funded by the borrowers in two different ways- an upfront mortgage insurance premium and an annual premium paid monthly. The upfront premium is 1 percent of the loan amount. Using that same $100,000 home, the upfront premium would be $1,000. Yet this mortgage insurance premium isn’t paid out of pocket but can be rolled into the loan amount.
There are maximum loan limits for the FHA loan program and these limits can change from county to county. These limits are calculated using 115 percent of the median home value of the area although the loan limit can be higher in areas that are deemed “high cost.” One of your higher trained loan officers can tell you about FHA loan limits for your area.
Finally, interest rates for FHA loans are competitive with other loan programs in today’s market including conventional loans using Fannie Mae and Freddie Mac guidelines as well as VA and USDA loans. If you or someone you know is saving up to buy a home and think the down payment is the biggest hurdle, it’s time to consider the FHA option. Call us at the number above to learn more today.