First Home Buying

Mortgages granted under the guidelines of the Federal Housing Administration are intended to give potential homeowners another incentive to buy. I’ll say it again: Uncle Sam wants you to own your very own place. FHA loans give lenders the ability to provide borrowers with lower rates and better loan terms. In exchange, the loan is insured by the government so that the added risk the lender takes on is offset. Some of the specifics on what an FHA loan can help you with are below.

Down Payment

Under standard practices (ie., NOT those of the past few years) lenders require a large portion of the home’s sales price to be covered by the down payment. Usually the maximum allowable loan is 80% of the amount you buy the home for, meaning you have to come up with the other 20%. A borrower who takes out an FHA loan, on the other hand, can be eligible to receive up to 97% of the sales price. For those of you who may be a little rusty on your mental math, that means that with an FHA loan you can put as little as 3% into a down payment. You will probably still have to pay PMI if you put down less than 20%, but paying a few extra dollars each month tends to be preferable to coming up with several thousand dollars more in order to get a loan in the first place!

Interest Rate

Most of us are aware of the dangers of subprime lending. Don’t be scared off by an FHA loan if you think I’m going to tell you that you’ll get a lower rate than what everyone else is getting. By default, mortgage rates are a few percentage points higher than the prime rate. So there’s a little bit of room for them to work with you. Also, regardless of how much (or little) you trust Uncle Sam, at least be assured that the government itself does not make a habit of creating administrative departments that purposefully provide hazy loan terms and don’t tell you the whole story. As a matter of fact, here’s an External Link Alert! The website of our helpful Department Housing and Urban Development.

Debt-to-Income

I’ve mentioned what this keyword means elsewhere, so I’ll get right to the point here. FHA loans allow this amount to be bigger; the amount of your mortgage payment as it relates to the total income you bring in per month is legally allowed to be higher than it is with a conventional loan. Still, you have to eat and buy shoes / movies / antiques / stickers / sports memorabilia / celebrity toenail clippings / whatever else you buy for a hobby, so don’t over-extend yourself if you’ve got a lot of monthly bills you can’t get out of. If you’re used to paying rent, you’ll find that in your first home buying experience a mortgage and everything associated with it can be a much more daunting task. In general though, these limits are put in place to keep your mortgage payment from swallowing up your entire paycheck:

Debt-to-Income Ratios