Buy a Home
If you’re preparing to buy your first home or if you’re buying a home and wondering if you’ll meet the requirements for financing the purchase, an FHA loan provides simple and flexible options.
Approvals are more attainable because of lower credit score requirements and smaller minimum down payments, yet FHA loans offer competitive interest rates.
There is a variety of loan options available for buying a home. Mortgage loans often differ depending on the requirements to qualify and the terms and conditions of each loan type, including the loan’s length, the interest rate and the minimum down payment.
An FHA mortgage loan is backed by the federal government through the Federal Housing Administration. The government insures lenders approved by the FHA to cover risks from borrowers who cannot pay back these loans. Every FHA mortgage holder pays a mortgage insurance premium (MIP) to help protect lenders against the possibility of such losses.
The protection this backing provides allows lenders to offer mortgage loans with more flexible requirements for qualification than conventional loans, including the possibility of lower credit scores for applicants. Another advantage is the possibility of a comparatively lower down payment, starting at just 3.5% of the home’s value.
These features make FHA loans a popular alternative, especially among first-time homebuyers.
To learn whether an FHA loan is your best option for purchasing a home, connect with us. To get you started, we’ve outlined the steps and documentation needed to help you understand the process.
Homebuyers often start by requesting a quote for their interest rate or beginning an application with us at Compass Mortgage. By sharing basic information about your finances, we’ll work with you to get a copy of your credit report, and we’ll help determine the value of the home you’re interested in purchasing.
In addition to arranging for an appraisal conducted by a licensed professional, we will schedule an inspection of the home to make certain it meets the minimum property standards which the FHA requires for properties it guarantees.
We’ll also discuss the terms and conditions for which you qualify and your options, and we’ll request various documents needed for underwriting your loan to make certain it begins on a solid foundation.
We’re with you through every step, all the way to closing when, together, we will finalize your purchase.
These are some of the common requirements to qualify for an FHA purchase loan. If you have any questions, we’re here to help!
Buying a home is an important investment, and borrowing the money to make the purchase is an important decision. It’s OK to have questions! We’ve compiled answers to the frequently asked ones, but don’t hesitate to ask more.
Both FHA and conventional loans offer flexible financing options. FHA loans differ in that they’re insured by the government, so lenders don’t need you to meet some of the parameters of a conventional loan.
If you have a lower credit score, an FHA loan may be the most affordable option for you. It may provide fewer options than a conventional loan, but it offers competitive interest rates and lower down payment options.
A conventional loan, on the other hand, often has more restrictive requirements based on standard borrower criteria. The benefit, if you qualify, is that you also get better options when it comes to your mortgage insurance, term lengths and closing costs, as well as a lower interest rate.
You’ll want to consider how much you’ve been able to save for a down payment and the value of the house you want to buy, as well as how the down payment amount impacts your potential mortgage.
With an FHA loan, you’re also able to use a gift toward your down payment amount, as long as it’s well documented as a gift and clearly not a loan.
A typical minimum required down payment amount for FHA loans is 3.5% for credit scores of 580 or more. With a higher down payment at 10%, you may qualify with a lower credit score, down to 500. Depending on your current finances and your homebuying situation, various requirements are considered to determine your minimum down payment amount.
The FHA has set property requirements to ensure that every home being financed with an FHA loan is a good investment for all involved.
The minimum property standards assess a home’s safety, security, soundness and structural integrity to evaluate if it will negatively affect the health, safety or security of its residents.
A home inspection carried out by a licensed professional will be required for this assessment. The inspector considers factors such as the condition of the home’s electrical wiring, plumbing, roof and HVAC (heating and cooling systems). (The home’s cosmetic features are not part of the inspection.)
To offer flexible qualification requirements, FHA loans require a Mortgage Insurance Premium (MIP). Homebuyers using an FHA loan will pay an upfront MIP that is included at closing, as well as an annual MIP, which becomes part of the monthly mortgage payment. The annual MIP decreases each year over the lifetime of the loan.
The MIP can be reduced based on various factors, such as if you have a higher down payment or a shorter term length.
For example, if your down payment is less than 10%, the MIP on your new FHA loan lasts for the life of the loan, reducing slightly each year. If your down payment is 10% or more, the annual MIP will only last 11 years.
A typical up-front MIP is around 1.75% of your loan amount. The annual MIP can range between 0.45-1.05% of your loan amount.
When you close your FHA loan to purchase a home, you’ll need to account for several costs, both those which are up front and those included in your ongoing monthly payment. These will be clearly outlined as your loan is processed and before you close.
Beyond your initial down payment, you’ll also pay closing costs which cover expenses such as loan origination fees, an appraisal, up-front MIP, title insurance and so on. These typically range from 1-3% of your total loan amount.
The FHA also allows that up to 6% of these costs can be covered by the person selling you the home. This may be an option if it helps everyone close the sale.