FHA Mortgages offer quite a few benefits. However, a question you may have is whether or not this is a good option if you are a first-time home buyer.
Unfortunately, there’s no black and white answer for this. In fact, the answer will vary from one borrower to the next.Even though the above is true, the FHA loan program is smart for first-time home buyers who have limited funds for a down payment and/or less-than-perfect credit. Learn more here.
First-Time Home Buyers and FHA Loans
There’s no single mortgage product that is right for all first-time home buyers. Each borrower is going to have different budgets, priorities and financial situations. The key is to find the right type of mortgage loan for your specific situation. To do that, you need to understand a few things, which include:
- How each of the products work
- How much it is going to cost you
An FHA mortgage may be right for you if you don’t have much money saved for a down payment, and it can be an option for those with low credit scores. An FHA home loan requires a down payment in the amount of 3.5 percent of the total purchase price or the appraised value – whichever one is less. This is partly what attracts people to the program to begin with.
However, there are some conventional options out there that have down payments that are as low as three percent, so don’t automatically rule those out.
Regardless of the program you use, you will likely have to pay for the mortgage insurance policy when you make a low down payment. This is true for FHA loans and conventional ones.
Mortgage Insurance: An Important Consideration for First-Time Home Buyers
Virtually every borrower who uses the FHA loan program will have to pay for mortgage insurance. This protects the lender, not the borrower.
There are two different premiums for anyone using the FHA loan program. The initial mortgage insurance premium is usually 1.75 percent of the total loan amount, and the annual premium for the majority of FHA borrowers is usually 0.85 percent (assuming the 3.5 percent down and 30-year term).
A non-FHA mortgage loan with a low-down payment typically requires mortgage insurance, too, but this is offered by a company in the private sector – not the government. From your perspective, you have to consider cost. Private insurance is usually less than what is assigned to an FHA loan.
If you are a first-time home buyer, you need to determine the full cost of your loan, which will include any mortgage insurance you may need. A quality lender is going to provide you with a total cost breakdown, so you can compare the financing options available.
The Role of Your Credit Score
If you are a first-time home buyer, and you have a less-than-perfect credit score, then an FHA loan may offer some advantages.
According to trends, approximately 7.34 percent of closed FHA loans went to borrowers who had a credit score of less than 600. For conventional loans, borrowers with credit scores of less than 600 were only about one percent of approvals.
As you can see, FHA loans are often a smart option for first-time home buyers. However, be sure to evaluate your situation carefully to ensure this option is right for you.