Many would-be homeowners give up way too soon. They think their dream of owning a home is over if they are unable to obtain a conventional, USDA, or VA loan. But it’s not always the case. There are still FHA loans available, which have lower credit standards and relatively cheap down payments. Do you think you would be interested in this? So continue reading to learn everything you need know about FHA loans while buying a house in Yucaipa, CA.
Overview of FHA Loans
You must be aware of what you need to know before deciding to apply for an FHA loan to buy a home in Yucaipa, CA. Let’s begin by giving a quick review of FHA loans.
“A mortgage that is guaranteed by the Federal Housing Administration is known as an FHA loan. FHA loans, which require a minimum 3.5% down payment from borrowers with credit scores of 580 or better, are well-liked by first-time home purchasers with limited savings or credit issues.”
“Mortgages issued by lenders such as banks, credit unions, and non-banks are insured by the FHA. Because of the insurance protecting them in case of default, FHA lenders are ready to give borrowers who might not otherwise be eligible for a house loan favourable conditions.”
But keep in mind that only lenders with FHA approval are permitted to offer loans with FHA insurance. However, single-family homes, two- to four-unit multifamily buildings, condominiums, and some manufactured homes are all eligible for FHA loans and can be purchased or refinanced in this manner. Additionally, there are specific FHA loans that can be applied to both new construction and home renovations.
FHA Loans vs. Conventional Loans
To help you get an even better handle on buying a house with an FHA loan, let’s see how FHA loans differ from conventional loans.
- Conventional loans are not “insured or guaranteed by the federal government.”
- FHA loans allow lower qualifying credit scores and (sometimes) lower monthly mortgage insurance.
- “FHA rules are more liberal regarding gifts of down payment money from family, employers, or charitable organizations.”
- “FHA loans may involve closing costs that aren’t required by conventional loans.
How FHA Loans Work
Before buying a house with an FHA loan, you should also know something about how they work.
The average FHA loan has a fixed interest rate and a period of either 15 or 30 years. But there’s a catch: “Borrowers must pay FHA mortgage insurance, which is intended to shield the lender from loss in the event of a default by the borrower.
In addition, all FHA loans require the borrower to pay two mortgage insurance premiums . . .
- 1.75 percent of the loan amount is paid as an upfront mortgage insurance fee when the borrower receives the loan (though the premium can be rolled into the loan amount)
- Depending on the loan length (15 years versus 30 years), the loan amount, and the initial loan-to-value ratio, annual mortgage insurance payments range from 0.45% to 1.05%.
The good news here is that for most borrowers who financed 90% or less of a home’s value, these insurance premiums will be canceled after 11 years. In addition, FHA lenders can charge no more than 3-5% of the loan amount in closing costs.
Qualifying Criteria for FHA Loans
Buying a house with an FHA loan means that you’ll have to meet certain qualifying criteria, such as . . .
- A down payment of 10% with a credit score of 500-579, but a down payment of 3.5% with a score of 580 or above
- A verifiable employment history of two consecutive years
- The house is to be used as a primary residence only
- Passing an appraisal by an FHA-approved appraiser, as well as meeting HUD guidelines
- A front-end debt ratio of a maximum of 31%
- A back-end debt ratio of no more than 43% of gross monthly income
- A two-year wait “before applying for the loan after bankruptcy or three years after a foreclosure
FHA Loan Pros and Cons
And now let’s look at some of the pros and cons of buying a house with an FHA loan.
- Lower credit-score requirement
- Relatively low down-payment requirement
- Opportunity to stop renting sooner owing to the ease of an FHA loan
- Mortgage insurance requirement
- Eligibility requirements for a property
- An APR often higher than with conventional loans
- FHA loans available only through FHA-approved lenders
The Yucaipa, CA Team That Can Help
For first-time homebuyers with less than perfect credit, FHA loans are quite alluring and a terrific way to start the house owning process. However, there are some rather stringent requirements for eligibility as well as clear benefits and drawbacks that must be considered. So how do you decide if an FHA loan is the appropriate choice for you? Our group of knowledgeable Yucaipa, CA agents can assist. They can aid in your search for properties that qualify and help you navigate the procedure. Please get in touch with us if you have plans to buying a home and are thinking about an FHA loan.