Many of the first time home buyer loan programs are from the government, such as FHA, VA and HUD. Zero down loans, such as the 80/20 carry PMI (private mortgage insurance) and an equity home loan in the package. This article will explain the benefits and disadvantages of each.
What is an FHA Loan?
An FHA loan is a government loan that requires a 3.5% down payment and a reduced form of PMI on the loan. It is a greatly reduced PMI, but it is still required on the loan package. Many foreclosure homes are sold through FHA and they have easier qualifying guidelines.
FHA is more lenient with credit score guidelines. They allow the borrower to apply for a loan even though their FICO credit score is under 700 and sometimes as low as 600 with a valid explanation of all delinquencies. Like the other government programs, all the less than perfect marks on the credit report need a valid explanation and the buyer needs to show good credit in recent months.
HUD Auction Bids
In order to buy a HUD home, the buyer must make a bid at the weekly auctions. The buyer must be represented by an agent and cannot make the bids on their own. They need to have a prequalification letter, earnest deposit and a signed offer.
The advantages of HUD are that the down payment is a very minimal $500-2000 and HUD will finance all repairs to be done to the property. With the offer, the agent must include the amount to be repaired. This figure is supplied by the HUD office.
Some of the disadvantages of this program are that the homes tend to sell for a high price with competition in the bids. Because of the terms involved many new buyers get carried away with the bidding not realizing they are buying over the value many times. The buyer can also apply for a title one loan (2nd mortgage loan) on the property with no equity involved.
VA Loans Require No Down Payment and No PMI
Many veterans flock to buy homes with no down payment incentive. There is a funding fee of 0-3.3% depending on the home. The funding fee may be financed with the loan. This first time home buyer’s loan program requires no down payment and no PMI. The seller may pay the closing costs and therefore the vet has no money involved in the loan.
Zero Down Mortgage Loans
Most banks carry some type of zero-down loans. Check with the bank close by to discover the best rates or look at bankrate.com and compare rates. Zero down loans require perfect credit scores over 700 and preferably 720. The basic loan package is the main loan and a home equity loan attached of 20%. With this type of loan, there is PMI included.
PMI remains on the property until there is 20% equity in the property and then the homeowner may apply to remove the PMI. It is not as easy as it sounds, though. It takes a while to be approved, the guidelines are strict and a new appraisal is required most of the time.
First time home buyer loan programs attract young couples who want to purchase their first home. With these four programs listed, there are many opportunities to purchase a home with little cash involved.
How to Get an FHA Home Loan
FHA loans were introduced in 1934 to help increase homeownership in the middle class during the great depression. Since then they have served as an excellent tool for middle and low-income families to fulfill the American dream of owning a home.
FHA loans are insured by the HUD. Since the loans are insured by the government, lenders are often willing to give better rates for FHA. In fact, interest rates for FHA loans are comparable to those of conventional loans.
FHA Loans for First-time Home Buyers
First-time homebuyers are one of the biggest benefactors of FHA loans. Most first-time homeowners find it difficult to come up with the 20% down payment requirement for conventional loans. Without the 20% down payment, they are forced to go for private mortgage insurance which can be costly. FHA loans require a minimum down payment of 3.5% of the loan amount, which can even be gifted by a family member, employer or a non-profit organization. Read FHA loans for first-time homebuyers to know more about the pros and cons of taking a fha loan while buying a house for the first time.
FHA loans for Borrowers with Less Perfect Credit History
FHA loans are also ideal for people with a less than perfect credit history. With tightened mortgage requirements nowadays, borrowers with a poor credit score are unable to get a conventional loan. Credit requirements for FHA loans are not as strict as those for conventional loans. For borrowers whose homes have been foreclosed or who have gone into bankruptcy, FHA will allow a home purchase two years after a bankruptcy and three years after a foreclosure.
Debt-to-income Ratios
Borrowers with a high debt-to-income ratio, especially first-time homebuyers who often have student loans and credit card debt, find it difficult to qualify for conventional loans. Fannie Mae and Freddie Mac prefer a maximum of 28% debt-to-income ratio for conventional loans but for an FHA loan, it can go as high as 41%.
Limitations of FHA Loans
FHA sets limits on how much a borrower can borrow based on the state and county in which the property is located. FHA loans became less popular in the period from 2000 to 2007 when the relatively low limits of FHA loans could not keep up with the surging home prices. Another disadvantage is the upfront mortgage insurance premium (usually 1.5 percent of the loan amount) which FHA charges and which is included in the closing costs.
To know more about the pros and cons of FHA and Conventional loans, read Comparing Conventional and FHA loans.
FHA Loan Requirements
FHA loan requirements are more lenient than those of conventional loans. The following are some of the requirements for getting an FHA loan.
- Steady employment for two years, preferably with the same employer.
- The borrower should have a minimum credit score of 580 or no credit score at all.
- FHA will allow a home purchase two years after a Bankruptcy and three years after a foreclosure, but the borrowers should have a perfect credit score since bankruptcy/foreclosure.
- The debt-to-income ratio of less than 41%. Monthly payments must be no more than 30% of the borrower’s income.
- Stable Income for the past two years.
The HUD site is a good source of information for borrowers looking to get more information about the FHA insured loans.
FHA loans are a great help for first-time homebuyers and people with a modest credit rating. Although a borrower with a good credit history and enough resources for a down payment can get better rates with conventional loans, it is a good alternative to sub-prime loans and zero-down payment loans.
