Make Home Buying More Accessible with a Lower Down Payment
FHA loans are a form of government-backed loan insured by the Federal Housing Administration. They are predicated on the idea of making home-buying more accessible to more Americans by helping reduce the required down payment. Large down payments can be one of the most significant barriers of entry to first-time, and FHA loans seek to remediate that difficulty. It also lowers other barriers to access, including allowing lower credit scores and a higher debt-to-income ratio.
If you’re seeking to purchase a home but need a lower down payment to make it happen, an FHA loan might be perfect for you. At Federal Hill Mortgage, we’re dedicated to delivering the best rates we can find through our brokerage and lending services.
To secure your FHA mortgage, we recommend you start by seeking pre-approval. Pre-approval helps simplify the mortgage shopping process by getting the information exchange going with your broker, allowing them to more quickly process a loan application. It also allows you to generate a rough idea of what you can afford when home shopping before a loan is secured.
Now it's time to apply for your loan. Unlike pre-approval, your full application is a more in-depth process that really digs into every detail of your financial history and current standings.
Next up, finding your dream home, and agreeing to the terms of a loan. Throughout the process, the Federal Hill Mortgage team works to guide you through every aspect of the buying process, from real estate agents we recommend to explaining closing costs.
As mentioned above, FHA loans are government-backed loans designed to increase accessibility to the housing market. Let’s explore the qualifications buyers have to meet to obtain an FHA loan.
The largest benefit of the FHA loan is that it allows buyers to access a reduced down payment. For most conventional loans, buyers are required to put down 20% of the purchase price. However, with an FHA loan, you are eligible to put down as little as 3.5%.
To put down 3.5%, buyers are required to have a minimum credit score of 580, which is a lower bar than most conventional loans would require. Exceptions may be made for those with a credit score as low as 500, but a down payment of 10% is required in those scenarios. Previous credit problems, such as bankruptcy or foreclosure, may not preclude borrowers where they might be for convetional loans.
A popular misconception is that there are stringent income limits barring buyers from obtaining an FHA loan. So, if you’re a higher income earner who simply has a poor credit history or less cash on hand, the FHA loan may be right for you.
One aspect of FHA loans typically considered a con is a requirement that you purchase a mortgage insurance premium. This is a form of insurance that protects lenders in the event that you default on your loan. An upfront mortgage insurance premium of 1.75% is also required at the time of signing.
Depending on your home buying goals, FHA loans may or may not be able to accommodate your needs based on the limitations put on its loan amounts. Typically, FHA loans are 65% of the area’s conforming loan limit. In 2020 for instance, the average US conforming loan limit was $510,400, which means the FHA limit was $331,760.
At Federal Hill Mortgage, our goal is to meet you where you are at, and help begin the journey towards an exciting future. Our expert team of mortgages can explore various options across conventional and governement-backed loans to find what’s best suited towards your needs.