July 30, 2021

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Homeownership without a big savings account

FHA loans were created to encourage and help first time buyers as the down payment on these federal housing administration secured mortgages can be as low as 3.5 percent.



a group of people sitting on a bench: FHA loan requirements


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FHA loan requirements

What is the Minimum Down Payment for FHA Loans?

The minimum down payment for FHA loans is either 3.5 percent or 10 percent, depending on your creditworthiness. A minimum of 3.5 percent is required for a down payment for those with a credit score of 580 or higher. Everyone with a credit score of 500 to 579 must have 10 percent for a down payment.

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For a $ 125,000 home purchase, that’s $ 4,375 on the low end and $ 12,500 on the high end, depending on your creditworthiness. This is a “major turnaround,” notes Jackie Boies, senior director of housing and bankruptcy at Money Management International. a nonprofit debt counseling organization based in Sugar Land, Texas.

“Many borrowers choose an FHA loan because they are easier to qualify, which allows for lower credit scores and some credit history errors,” says Boies.

FHA loans are often good for first time buyers because the down payments are lower, as are the minimum loan values ​​that help borrowers buy a home sooner. While the mortgages are insured by the federal government, the loans are made through mortgage lenders who have been approved by the FHA.

“They tend to have interest rates that compete with loans that are out of reach for some borrowers,” says Boies.

What Are The Mortgage Insurance Requirements For FHA Loans?

One catch with FHA loans is that borrowers are required to do so Pay mortgage insurance premiumsor MIP if they decrease less than 20 percent. This additional payment is required because the lenders take a higher risk because the borrower made a lower down payment. This could affect the lender if the borrower fails to make payments on the loan and defaults.

FHA loans come with two mortgage insurance premiums:

  • Pre-mortgage insurance premium: 1.75 percent of the loan amount paid when the borrower receives the loan; The premium can be added to the mortgage
  • Annual mortgage insurance premium: 0.45 to 1.05 percent, depending on the term of the loan (15 years versus 30 years), the loan amount and the initial loan-to-value ratio (LTV); The bonus is divided by 12 and paid monthly

For a homebuyer borrowing $ 150,000, that means the MIP upfront is $ 2,625 and the annual MIP is between $ 675 ($ 56.25 per month) and $ 1,575 ($ 131.25 per month).

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Unlike private mortgage insurance for a traditional loan, FHA loan borrowers with less than 10 percent stake must pay these premiums for the life of the mortgage. The only way you can stop paying them is if you can Refinance in a Non-FHA Loan or sell the house.

“”[FHA] Loans are designed for low- to middle-income borrowers and offer unique concessions and perks, “said Chris de la Motte, co-founder and president of Simplist, a New York-based digital mortgage market.” ..strict requirements such as required mortgage insurance premiums and credit limits not included in other alternatives. “

“The downsides to an FHA loan are that it requires mortgage insurance for the life of the loan and meets minimum real estate standards,” said Amy Wilemon, mortgage originator at Silverton Mortgage in Atlanta. “For example, the house must be your primary residence and may not need major repairs.”

Down payment gifts and FHA loan rules

Borrowers receiving an FHA loan can receive cash as a gift, which will count towards the total amount of the down payment.

There are several rules that borrowers need to follow. According to the U.S. Department of Housing and Urban Development (HUD), gifts can come from friends, family members, unions, and employers. Even non-profit organizations can provide money to contribute to a down payment.

HUD prohibits these parties from contributing to a deposit:

  • House builder
  • Seller
  • Real estate agent or broker
  • Anyone with a legitimate interest in selling the home

FHA loan down payment assistance

While the FHA does not have its own down payment support program, each state offers different ones Deposit support programs for both first-time buyers and low-income home buyers. Borrowers who receive an FHA loan are usually eligible for these programs.

You can Browse first-time buyer programs by state on bank rate.

Other low down payment mortgages

Aside from FHA loans, there are other types of loans Mortgages that have either a low or no down payment Requirement. These include:

  • Fannie Mae and Freddie Mac 3 percent loan – Both offer conventional loan programs with only 3 percent less.
  • VA loan – There is no down payment requirement for these military, veteran, and their family loans that are supported by the U.S. Department of Veterans Affairs.
  • USDA loan – The US Department of Agriculture guarantees no down payment loans to borrowers in eligible areas.
  • Native American direct loans – Native American Direct Loans (NADL) for eligible Native American veterans and their spouses are also not required to pay a deposit in most cases.

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