About First Time Buyer FHA Loans

FHA Loans are United States Government insured loans for the purpose of purchase or refinance of one to four unit owner occupied residential properties, condominiums and manufactured homes. It is perfect for first time homebuyers, however it can be used by anyone who qualifies under FHA guidelines. There are several popular loans to choose from. FHA does not actually fund these loans, they just insure them (to the funding lenders) in case the borrower defaults. Since subprime lenders have closed down, FHA has made a very strong comeback in the mortgage market.

Who Benefits From an FHA Loan?

Young families definitely win with an FHA purchase loan. Low down payment of 3.5 percent of purchase price (not available on any other type loan) is only the beginning. In the 2009 market with tightened credit guidelines and higher score requirements, FHA is making it better for first time homebuyers by allowing the buyer's relative to gift the low down payment to him. If no relative can do this for the buyer, he can participate in any of the down payment grants that are available. FHA allows for more lenient debt ratios than convention lending, making qualifying easier. While FHA does not have a minimum score requirement, most lenders that fund FHA loans have a minimum score requirement of 620 for this loan.

FHA's Flexibility: Refinance Benefits from FHA

While a first time home buyer wins with FHA on a purchase, someone needing to refinance a mortgage can benefit as well. Recent guideline changes allow for a cashout refinance up to 85 percent of the appraised value of the home. With recent decreases in property values, it may be worth it to refinance your mortgage to decrease the interest rate (and payment) without getting any funds back. In this scenario, FHA will allow for up to 95 percent of the appraised value. This transaction has the same 620 credit score requirement with most banks funding FHA loans.
If the homeowner who is refinancing already has an FHA loan on the property, he can do an FHA Streamline loan. This loan does not require a reappraisal of the property or requalifying for the loan if he proves that he has had a clean payment history. This makes FHA absolutely an awesome choice for first time homebuyers since it is easy to refinance if interest rates decrease in the future.

Types of FHA Loans Available

FHA offers a variety of programs to choose from. A 30-year fixed rate is available, and so is a 15-year fixed rate. There are a few adjustable rate programs as well. There also is a purchase loan that can be had through FHA called the 203K, and is used for renovation of the property being bought. This loan is not for new construction, but rather, renovation and rehab of an existing home.

100% FHA Loan For Building Rural Areas

To encourage home buying in rural (low population areas of the) United States, FHA offer a 100 percent Rural program. It features a 100 percent loan (no down payment) and the same expanded debt ratios as a regular FHA loan. It allows the seller to contribute closing costs, and has no MIP (mortgage insurance premium) required. This loan is perfect for a first time homebuyer in a rural area, but those who qualify for it can use it. There are income restrictions, so ask your lender or broker about qualifying.

Negative Aspects of an FHA Loan

If you compare FHA to FNMA or FHLMC, there seems to only be one negative aspect. This has to do with the MIP (mortgage insurance premium). The up front amount, which has now increased to 1.75 percent of the loan amount, is normally financed (added to the loan amount). On larger loans, this is no small amount. Additionally, on 30-year products, (not on 15 year loans) a .55 percent of the loan amount is also added to the monthly payment. The monthly add on does eventually drop off when the loan is paid down over 5 years time.

The Positive Side of the Negative

The positive side of the negative is that these insurances allow a young buyer to get into a home with the smallest allowable down payment. If the borrower tried for a conventional (FNMA or FHLMC) loan, this day in time, they would have to come up with a down payment of 10 percent, and they would still have to pay a monthly PMI (private mortgage insurance) charge. He would need credit scores in the 720 range as well, so MIP charges are not a bad tradeoff.

Resources

• Qualifying, Rural Program, Q&A