Owning a home is one of the first, and most beneficial, steps for those who want to build financial wealth. Instead of paying rent that helps a landlord become wealthy, homeowners can build equity in their own homes with each payment they make. By the time they decide to sell the home, they have often built up thousands of dollars in equity that can help them purchase their next home or pay for other needs.
But purchasing the first home is not always easy, especially for buyers who are just establishing their careers, building relationships, or raising young families.
If you are a young buyer struggling to purchase your first home without the benefit of a lot of cash or a perfect credit score, the FHA home loan may be just what you need to succeed.
FHA Home Loan Basics
The Federal Housing Administration (FHA) was established in 1934 with a goal of making it easier for Americans to purchase a home. While FHA home loans are popular with first-time buyers, they can be used by any buyer who meets their qualifications. Borrowers who successfully qualify for an FHA home loan will:
- be required to make a down payment of 3.5 to 10 percent of the purchase price
- have debt-to-income (DTI) ratios of up to 50 percent
- plan to purchase a home that certain criteria for the condition, cost, size, etc.
Lenders who extend FHA loans receive a guarantee by the Department of Housing and Urban Development (HUD) in case the borrower defaults. For this reason, FHA borrowers are required to pay a modest mortgage insurance premium (MIP).
Gift funds can assist with costs
Another positive reason to choose an FHA home loan is that gift funds can be used to assist with the down payment or closing costs. The gift funds must, however, come from an approved, documented source and be seasoned for a specific time before they can be used.
Perfect credit is not required
While having a good credit score is always preferable, buyers who have some types of credit issues that would prevent them from getting other types of mortgages can often still be approved for an FHA home loan. Buyers who have credit scores of 580 and above can qualify for a loan with just 3.5 percent down, while buyers with scores between 500 and 579 will need a larger down payment of 10 percent.
To learn more about the FHA home loan so that you can decide if it is right for your home buying situation, take time to discuss your concerns with a mortgage broker.