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5 Ways an FHA Loan Works for You

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Tags: First Time Home Buying, Digital Home Lending, Mastering Mortgages

Buying your first home can be overwhelming, and with so many factors to consider, it can be hard to know you're making the "right" decision. Today, we're here to help untangle a knot in the home loan rhetoric rope and show you how an FHA loan works to the benefit of first time home buyers.

Government Insured

FHA loans are among the most popular loan types available today, offering many attractive qualities for first time home buyers. One distinctive characteristic of an FHA loan is that it's insured by the Federal Housing Administration (FHA). This means that if you were to default (not pay your loan), the FHA would pay a claim to your mortgage lender. The borrower, in turn, pays mortgage insurance premiums either at closing or as part of your new loan.

This differs from a conventional loan where, if the borrower is to default, the lender can try to recoup the loan balance through foreclosure or auction. Failure to pay your mortgage can negatively affect your credit score and make buying a home in the future even more difficult.

Low Down Payment Requirements

Generally, FHA loans allow potential borrowers to finance up to 96.5% of the home's value, which means borrowers only need a 3.5% down payment to qualify. This differs from other loan types, which can require anywhere from 5% to 20% down. Additionally, FHA loans permit family members and organizations to give money to borrowers to use towards the down payment.

Low Credit Score Requirements

FHA loans are one of the best loan types to consider if you have less than stellar credit, requiring a qualifying score as low as 580. Even those with credit scores falling below a 580 (500-579) can still be approved for an FHA loan if they can make a down payment of at least 10%.

It's important to note that while borrowers can still obtain attractive mortgage interest rates with an FHA loan, the borrower's credit score ultimately plays a more significant role in what rates borrowers qualify.

Higher Debt-to-Income Ratio

A debt-to-income ratio (DTI) refers to a person's monthly debt load compared to their gross (before tax) monthly income. Generally, FHA loan requirements allow borrowers to have up to 50% DTI, which is helpful for first time home buyers who may be in the process of paying off debts like student loans, car payments and credit cards.

If debt is something you're worried about, consider lowering your DTI. You can accomplish this a number of ways, like increasing your monthly debt payments or paying off debts completely, increasing your income, or adding another person to your loan.

More Housing Options

FHA loans allow the borrower more freedom in the type of home they purchase. For instance, FHA borrowers can consider several housing options, like single-family or multi-family homes (up to 4 units), condominiums, or a manufactured home located on a permanent foundation. FHA loans do have more rigid property standards than other loan options designed to ensure the borrowers' safety and security and the lenders' investment in case they ever had to seize the property.

If you're a first time home buyer looking to find your perfect mortgage loan, contact Wyndham Capital Mortgage and ask a loan officer about the benefits of digital home lending and how it can benefit you in your search for the perfect first home.

Interested in learning more about how Wyndham Capital can help you achieve your home lending goals?

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