When it is time to buy a home there are all kinds of things that you ought to know in order to make sure you are understand the process well enough in order to get yourself in the best possible position. Although most people who buy a home have long-term plans to live in the home for years to come, other people may have something different in mind. When shopping around for loans, there are a couple of factors that you should be informed of in order to make the process easier so you can weed out a large chunk of loans that you do not want or qualify for anyway. Most first time home buyers are not sitting on a ton of cash and if you do not have access to anywhere near 20% for a down payment on the home of your choice then you should probably be looking at an FHA loan. Federal Housing Administration (FHA) loans are backed by the federal government and although they are not a lending institution so they do not fund the loan, they guarantee it and work with lending institutions that are willing to relax their qualification standards based on the fact that they will not ultimately be responsible if the loan were to go into default for any reason. So, when the FHA and lending institutions work together, the American home buyer wins in many ways and here are some of them:
1. The minimum credit score required to qualify for an FHA loan is only 580. In order to get a reasonable loan rate with a conventional loan they are often going to want to see people in at least the mid-600s and would prefer a score in the 700s. The down payment for an FHA home loan is only 3.5% compared to 10-25% for a bank loan and depending on the home and the house market you are buying in; this percentage difference could equal tens of thousands of dollars. The fact of the matter is that just these two factors alone in the FHA loan requirements make it possible for some people to buy a home who would not be able to qualify otherwise. Everybody can fix their credit and improve their score but saving up $50,000 for an even a 10% down payment on a half a million dollar house in many home markets that buyers already rent and are employed in would make this an insurmountable dilemma for many people. And, if that amount was closer to the 25% mark, it could be downright impossible to get a conventional bank loan because how many first-time home buyers have $125,000 sitting in the bank?
2. The 3.5% down payment can come from another source and closing costs can be covered by the lender or seller. Buying a home is an expensive prospect not only because of the cost of the down payment but everything else that goes into the home, literally. It costs a lot of money to properly furnish a home after someone moves into it and although this does not have to occur immediately, having some money set aside for this process would be helpful. So, FHA residential home loans make it so the required 3.5% down payment can be provided by an employer, a grant from a local down payment assistance program or a family member. Also, closing costs up to 6% can be paid by the seller, builder or lender if they choose if it is in their best interest to do this in order to sell the home; they are only allowed to do up to 3% with a conventional loan. You should understand though, that when your lender offers to pay closing costs they are often going to increase the loan rate in order to make their money back for providing this convenience. This may or may not be worth it based on your available funds. Asking a lender for a ‘good faith estimate’ (GFE) on closing costs is a good idea so you have a number to compare the benefits of getting a higher rate based on closing costs being paid by your lender.
These are just a couple of things to start thinking about if you are getting serious about the idea of buying a home. Saving money is always a good habit to get into whether you want to buy a home or not so if the time ever comes where you want or need to, you will be prepared to make it happen. Requesting a copy of your credit report now may also be a good idea so you can start to clean up any outstanding debt issues that you may have so you can make sure that you have a strong score.