Many first time home buyers use the Federal Housing Administration (FHA) to get a loan with a lower down payment and other lending requirements that are more accommodating.
Why Do People Apply for FHA Loans?
Getting a traditional mortgage is not always easy for home buyers, especially for people buying their first home. Saving up for a down payment of 10 percent could be very difficult for someone with limited funds. FHA loans are designed to provide some minor accommodations to buyers who would not be able to buy a home otherwise. FHA loans offer more flexible requirements on:
- Minimum credit score for approval
- Maximum debt-to-income ratio for mortgage payment and total debt
- Minimum down payment
If you live in a region where your income is enough to reasonably make a mortgage payment, but home values exceed your ability to qualify for a traditional mortgage, a few extra percentage points in a maximum debt-to-income ratio could allow you to buy a decent home in your area.
How Do I Qualify for an FHA Loan?
You have to meet certain requirements in order to be eligible for an FHA loan. It starts with a credit score of 500 or higher, or 580 if you want to qualify for a loan with a down payment of 3.5 percent. You must be able to come up with the money for the down payment and for a small amount of closing costs. When you apply for an FHA loan, you do not receive money through the FHA itself; instead, the FHA guarantees loans by various banks and lenders in your area. That way, the lenders are more likely to approve a loan for you.
Do FHA Loans Have Special Requirements for Home Buying?
The FHA is very specific about the types of home sales that lenders should approve. In most cases, it affects what the seller can require of the purchase. In a traditional home sale, you make a purchase offer. If your offer is accepted, you negotiate with the seller to decide who covers any necessary repairs and make a plan for the closing costs. FHA sets limits on the amount you can offer for a home depending on the area. A home inspection is typically mandated, and the seller is expected to pay for most required repairs. The seller must also be willing to pay most of the final closing costs on the buyer’s behalf.
How Can I Entice Sellers to Accept a Purchase Offer?
Because of the additional responsibilities on the part of the seller, some sellers are wary of accepting offers from buyers who have funding guaranteed by an FHA loan. The trick is to find the right seller, or try to catch sellers at a good time. For example, a homeowner who has been trying to sell a home for several months might be more willing to shoulder some added costs just to get the home off the market. If you live in a hot real estate market, you might consider increasing the amount of your purchase offer to sweeten the deal for sellers.
No matter how you finance your home, you always want to make sure that your offer is reasonable for your budget and will leave you with the funds you need for moving and any customization you want to do once you move in. In exchange for more stringent buying restrictions, FHA loans often allow buyers to purchase a home without investing quite as much at the outset.
