Whatever your got-to home buying strategy is—a cash buyer or home loan diva—we've put together…
Everyone has a mental picture of their dream home. Some people may prefer to live in a detached house with its garage or even a garden. On the other hand, if you are a city person, you might want to live in a brownstone so that you can get closer to all your favorite hangout places.
It can be hard to shrug off the desire to buy your own home. You’ll have more freedom because you won’t have to abide by somebody else’s rules and you’ll feel more secure about your future. It is even more complicated if other factors are urging you to find your place.
So what’s holding you back?
If you don’t have enough savings to buy a house outright, you can apply for a mortgage. You can log on to Annual Credit Report to find out your credit score and begin your home loan journey.
If you’re scared about qualifying for a mortgage, you should know that you can get one today, no matter what your credit score is. Americans are eligible for at least one type of mortgage if only they are willing to apply.
Read more and find out.
Table of Contents
Benefits of Getting a Mortgage
As of May this year, the average price for a home in the U.S. is 287,148 dollars. Unfortunately, this amount can be too expensive for the average American family to pay all in one go.
In 2016, the Federal Reserve’s Survey of Consumer Finances reported that American households typically only had $40,000 in liquid funds. So if a family had to buy a new house, they could only do so with the help of a home loan.
Mortgages are just a way of life in America. It makes purchasing real estate easier on the pocket if you don’t have to tie up funds to this asset. Instead of paying towards a home purchase, you can use your money to build a business, take more classes, or maybe even invest in cryptocurrency.
However, people can still be put off from getting a mortgage for the sheer amount of time and resources you have to dedicate in chase of the perfect loan. You can’t always expect that you’ll be approved by the first lender you speak to, and, sometimes, you might even require the help of a mortgage broker. In addition, you have to pay for closing costs with fees that may not even go toward equity.
If you’re having second thoughts about getting a mortgage, ask yourself the following questions:
- Am I ready to leave my current home?
- Am I in a good position financially to take on this responsibility?
- Do I already have an idea of where I’ll be moving?
- How will the move and the mortgage affect my employment?
- Is this something I have to do now?
Using a mortgage to finance a home is a solution. Most people will not save hundreds of thousands of dollars before they reach a certain age. At the same time, most people will also not be able to delay providing shelter for themselves. Homes are a necessity.
What is a Federal Housing Administration (FHA) Loan?
Even if you’ve barely paid attention to talk of borrowing money for a home throughout your life, you’ll most likely be familiar with FHA loans.
The Federal Housing Administration technically does not lend out the money themselves. Instead, they only guarantee a type of government loan that aims at helping first-time homebuyers purchase a primary residence. Nevertheless, it is the fundamental reason for their existence.
The Roosevelt Administration formed the FHA during the Great Depression. At the time, disadvantaged people, especially racial minorities, typically found it nearly impossible to borrow money to purchase a home. So to create more jobs and strengthen the housing market, the government decided to start guaranteeing home loans so that lenders would be motivated to let more people borrow their money. In a way, the program worked, and today, the rate of homeownership is 65.4 percent. So even if you have a poor FICO Score in the low 500s, you’ll still be able to get yourself approved for an FHA loan.
Reasons to Get an FHA Loan
So why do a lot of people tend to get FHA loans? Why is it so popular?
Truthfully, the answer is not so rosy. According to Experian, 34% of Americans have bad credit, defined as a FICO score below 670.
It is common for someone to choose an FHA loan because they have no other option. Conventional loans require a minimum credit score of 620, while VA loans and USDA loans have specific requirements beyond credit that will disqualify many people.
The FHA loan has its benefits, though. So whether you have a choice or not, you’re not getting the bottom of the barrel. Furthermore, many borrowers who get FHA loans often plan for a way out before they hit the 30-year mark.
Once you start paying for your mortgage and the initial effects of your application wear off, you’ll slowly see your credit score rise. Together with good credit habits and on-time payments, eventually, you might even qualify for a conventional loan. So if you see the opportunity for a refinance in the future, this will be the best route to take.
In the meantime, these are some of the benefits of FHA loans you can enjoy now.
1 – Lower minimum credit scores
If you have a bad credit score, there’s a high possibility you’ve had financial setbacks. But the minimum credit score to qualify for an FHA loan is just 500. So even if you’ve declared bankruptcy or been through foreclosure for a different home loan, you can still get a second chance with an FHA loan.
2 – Low minimum down payment
There is two minimum down payments for FHA home loans according to your credit score. This amount is derived from the house’s original purchase price.
You either pay at least 3.5% if you have a 580 credit score or higher, or you have to deposit a minimum of 10% in case your score is lower.
According to the numbers from Experian, more people would be eligible to pay a minimum 3.5% down payment for an FHA loan. Sixteen percent of Americans have scores below 580, while eighteen percent have scores from 580 to 669.
3 – You don’t need to pull all of the down payment from savings
The FHA loan program is also the only type of mortgage you can find that will not require you to empty your savings to meet the down payment requirement.
For the FHA, it is okay to use funds gifted by family or friends, as long as they are willing to signify that the cash was freely given. There are also state and local down payment assistance programs that award cash grants for FHA loan borrowers. You can even ask your FHA lender to guide you in their direction.
4 – FHA mortgage insurance is more affordable than conventional
FHA loans require payment for mortgage insurance. This is insurance paid to protect the lender in case you stop repaying your loan.
The good news is, compared with the private mortgage insurance charged for conventional loans, FHA mortgage insurance is cheaper.
Reasons Not to Get an FHA Loan
Now, it’s time to talk about all the valid excuses to put off applying for an FHA loan.
Overall, it’s only reasonable to understand what you’re getting into before you are deep into making monthly mortgage payments.
1 – You pay for mortgage insurance longer on an FHA loan
When you get a conventional mortgage, you don’t always have to pay mortgage insurance, but you’ll need at least 20% of your house’s worth. On the other hand, for FHA loans, mortgage insurance is inescapable regardless of how much money you pay down at the beginning.
An upfront mortgage insurance premium at closing and an annual mortgage insurance premium wrapped in your monthly mortgage payment. Now, the upfront one is just a fact of life. For the monthly premium, however, you must be borrowing a loan amount not greater than 90% so that you only have to pay insurance for eleven years. If you make a down payment below 10 percent, you keep insurance for the life of your loan.
No matter how much cheaper the mortgage insurance can be for FHA loans than conventional loans, that’s a lot of money if you have to pay insurance premiums for thirty years.
2 – You can only use it for a primary residence
You’re loaning this money from a federal agency, so if you commit fraud, you commit a federal crime.
When you sign for an FHA loan, this means that you pledge to stay in your new home for at least a year to verify occupancy. Therefore, you can’t use this loan if you’re only planning to buy a second home, a vacation home, or a property you’re going to rent to others.
The Department of Housing and Urban Development does send people to check if you are adhering to this rule, so you better watch out!
3 – It’s a seller’s market at the moment
If you have at all glanced at the news in the past couple of months, you’d be aware that we currently have a seller’s market. Although the effects of COVID-19 are easing up, there are still not enough houses to meet the demand, and buyers are competing with each other to snatch up available homes.
More or less, using an FHA loan for a home purchase in 2021 might mean that you’ll be negotiating with sellers for weeks or even months. The requirements for FHA loan approval are not beneficial for most home sellers.
“Do or do not. There is no try.”
As Yoda might say: if you’re in, you have to be all-in. The housing market is a strange and frequently unpredictable place, but the experience can also be exhilarating. You’re deciding of a lifetime.
Are you thinking about getting a mortgage because there is a home that has captured your heart? If there is one already, it’s up to you to decide how far you’re willing to fight for it.
So are you in or out?