New American Funding Blog

Buying a Home with an FHA Loan

By Rachel   |  November 23, 2016

Millions of homebuyers in the U.S. are eligible to purchase a single-family or multifamily home with the help of a Federal Housing Administration (FHA) loan.

Millions of homebuyers in the U.S. are eligible to purchase a single-family or multifamily home with the help of a Federal Housing Administration (FHA) loan. These loans are especially popular with younger, first-time homebuyers since they allow for a lower down payment and have more generous approval criteria.

FHA loans aren’t issued by the agency itself. Instead, the FHA provides mortgage insurance on loans made by FHA-approved lenders. This insurance protects the lender in the event the borrower runs into payment difficulties and makes it easier for the lender to approve a loan.

How do you decide if an FHA loan is right for you? Here are some key points to help you decide:

Low Minimum Down Payment

While some people wait until they’ve saved enough to make a large down payment, you can  apply for an FHA loan with just 3.5 percent of the home’s purchase price. Buying now with a smaller down payment enables you to start building equity in a home sooner, which can give you a stronger financial base.

Mortgage Insurance Premiums

As you evaluate your budget for a home purchase using an FHA loan, keep in mind that part of your closing costs and your monthly payments will be made up of the FHA insurance premiums.

At closing, the FHA charges an upfront, one-time premium of 1.75 percent of the mortgage amount. This fee can amount to thousands of dollars ($1,750 for every $100,000 borrowed) added on top of typical closing costs.

Once you begin making mortgage payments, you will also have to account for an annual premium that is paid over the course of 12 monthly payments each year. This annual premium (0.85 percent of the mortgage amount on a 30-year loan with the minimum down payment) would amount to $850 per year for every $100,000 of the loan balance, adding just under $71 to each monthly payment.

Credit Score Leeway

Your overall pattern of dealing with credit responsibilities is the biggest factor in securing any mortgage. While it’s always good to know your credit score and to do everything you can to keep it strong, the more generous terms of an FHA loan allow you to apply even if your score is less than perfect.

Taking on a mortgage is a big step. We encourage you to speak with your Loan Officer to see if you’re financially ready and able to step into homeownership with the help of an FHA mortgage.

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