FHA loan is a good first time buyer program. It is the preferred choice for the majority of home buyers. The FHA loan is specifically designed for first time home buyers because it offers a much lower down payment requirement, easier terms and overall qualifications. This simplifies the first home buying process.

What are the benefits of FHA? FHA has many benefits such as low down payment, lower reserve requirements, lower credit scores, better income to debt ratios, larger allowance for closing costs and more. Lets look at each FHA benefit a little closer starting with down payment.

Down Payment:

FHA loans offer down payment as low as 3.5%. Unlike Conventional Loans which don’t require the consumer to purchase mortgage insurance if the down payment is 20% or higher, FHA loans have to be insured at all times regardless of the downpayment amount. This is a big drawback of FHA. However, in regards to mortgage insurance, FHA program gives you the option to add the up-front mortgage insurance cost to your total loan amount to be financed by the lender. We will discuss mortgage insurance in detail a little later.

Reserve Requirements:

Banks want to secure their investments and require you to have reserve money in your bank account for your monthly expenses in case you loose your job or for other unexpected circumstances and unforeseen expenses. FHA currently requires only 1 month of reserve funds in the bank making it much more attainable for first time buyers to own a home.

Lower Credit Score:

FHA understands we all have had credit problems at some point in our lives. That’s why FHA has more lenient credit requirements than other programs. If your credit score is 580 and above and you do not have significant derogatory or late payment issues that have recently appeared on your credit report, you will not be left behind. Therefore, if you have less than perfect credit, FHA program might be the best choice for you.

Better Income Ratios:

Income to debt ratio is very important in the mortgage loan process. This is because it determines the dollar amount of the home you can own. Banks look at your income compared to your debt obligations to determine what maximum monthly payment you can afford. Where some programs may allow your debt, including your mortgage payment, to be only 36% of you total income, FHA allows up to 43% debt compared to your income. This makes it possible to qualify for a larger loan amount. In some FHA cases, up to 50% is allowable with manual underwriting if you are a strong buyer with large cash reserves.

Closing Cost Allowance:

Closing costs can be very costly but sellers can contribute a certain amount to help the buyer with the purchase. Many programs have a cap of 3% on seller contributions for closing costs. FHA allows up to 6% of the loan amount which in most cases can be enough to cover all your closing costs.

Now that we have covered the benefits or FHA, lets look at some of the disadvantages. The main disadvantage of FHA is that the lower requirements come with a price tag. Because FHA loans are insured by the government they pass on the cost of insurance to the consumer. FHA has two types of insurance that are required: Up Front Mortgage Insurance Premium (UFMIP) and Annual Mortgage Insurance Premium (FHA MIP). UFMIP is pretty straight forward and is a lump sum insurance premium equal to 1.75% of the loan amount that is usually rolled up into the loan. MIP is bit more complicated. It is calculated annually and is based on your LTV (Loan to Value) and Down payment. It is also paid as a monthly installments on top of your mortgage payment.

Consult with one of MortgageLA’s knowledgable loan officers to learn more about FHA loans.