FHA Loans For The First Time Home Buyer

Dating back to 1934, the Federal Housing Administration (FHA) has been a catalyst enabling more than 36 million first time home buyers to secure a mortgage. This program's popularity is again trending higher as home buyers are looking for affordable mortgage alternatives in a constrictive market.

What makes an FHA loan different is that it is backed by the United States Government. If the buyer goes into default, the government takes possession of the home so the lender does not have to write off the bad loan. Because of that protection, FHA approved lenders typically have relaxed qualification guidelines due to minimized risk.

One of the most attractive features of an FHA loan is the small down payment. Conventional loans require a borrower to put down 20%.  If that buyer doesn't have 20% they may have to take out an additional loan (called a "second") or pay Private Mortgage Insurance every month.  With an FHA loan a buyer can put down as little as 3 1/2%.  That money can come from the borrower or from a family member as a gift.

Despite the low down payment amount FHA loans are not sub-prime loans.  Sub-prime loans are mortgages made to borrowers who do not meet standard underwriting guidelines for any number of reasons including a poor credit history.  Because sub-prime loans are riskier the interest rates run higher.  That is not the case with FHA loans.  Expect interest rates to be competitive, and the lender's fee schedules to be very transparent with no hidden charges.

For conventional loans, a borrower's credit reportis a key indicator for lenders to determine the willingness of a borrower to pay the loan back as agreed.  FHA loans are not credit score based. Lenders will still look at your credit history to gauge how responsible of a consumer you are, but there is no set score minimum. However, credit scores under 600 are unlikely to be approved. Qualifying ratios such as the debt-to-income ratio are also looser on FHA loans than with conventional loans.

Another benefit of an FHA loan is the Administration's willingness to work with borrowers who fall behind on their payments. Because the FHA has to take possession of any home they guarantee, they would much rather keep borrowers in their homes instead of going through the headache of foreclosing.  Work out assistance is available for any and all recipients of FHA loans. For more information on those programs check out www.fha.gov.

There are some drawbacks to FHA loans.  First, you will be required to buy mortgage insurance up front.  The premium is usually around 1.75% of the value of the home.  From then on that annual premium will be paid by the borrower in monthly installments combined with the mortgage payment.  Once the Loan-to-value ratio of the home falls below 78% mortgage insurance is no longer required.  These premiums are pooled by the FHA to off-set their losses on the loans they guarentee.

There is also a base mortgage limit which varies from city to city.  Typically an FHA loan should be available for any "moderately" priced home.

Remember, FHA laons are only available on owner occupied properties.  They can be used to purchase attached and detached single family homes as well as town houses, manufactured homes, and approved condos.  To find an FHA lender and the best interest rates available ask your mortgage broker.