Mortgage Finance Tips For First-Time Home Buyers
Unless you have a giant stack of money just lying around then you’re probably going to need some type of mortgage financing to purchase your first home. If you’re like many buyers across the country then you probably have many questions. Should you try to get an FHA-insured loan or should you go conventional? What about mortgage insurance? Is there any way to avoid paying it if you put down a larger down payment? Is there a difference a major difference between the prevailing interest rates under FHA’s programs compared to those of conventional loan programs? There are examples of questions that many borrowers face. Here are some of the ways that FHA and conventional loan programs differ.
FHA requires that a borrower come up with 3.5 percent of the purchase price as a down payment. Conventional loans require a minimum of 5 percent. Regardless of the loan-to-value on a 30-year FHA-insured mortgage loan a borrower must pay for mortgage insurance both annually and upfront. Depending on the loan-to-value ratio, a borrower will have to pay a certain percentage of mortgage insurance with a conventional loan. Borrowers don’t have to pay mortgage insurance when the loan-to-value is at or below 80 percent. As interest rates tend to be comparable for FHA and Conventional loans it is generally the amount of mortgage insurance that will determine which loan costs more over the life of the loan, all other things being equal.
With FHA there is more flexibility with regard to credit compared to conventional loans. For example, a borrower with no traditional credit history at all, or even a troubled credit history, may qualify for a loan under FHA guidelines. When a borrower has gone through a period of bad credit FHA underwriter will try to determined the cause. When a borrower undergoes a time of financial struggle that is the direct result of circumstances that the borrower has no control over of then the borrower may be eligible for an underwriting exception so long as the circumstances that led to the difficulty are a thing of the past. The death of a spouse or even a serious medical problem are just two examples of circumstances that would be considered beyond a person’s control. Plus, no minimum credit score is required in order to be eligible for an FHA-insured loan. Nevertheless, you’ll find that many FHA lenders have a minimum credit score requirement which has been voluntarily imposed. Conventional loan guidelines are much stricter with respect to credit.
While the collapse of the sub-prime mortgage market and all the upheaval that followed brought all mortgage borrowers under greater scrutiny it is nevertheless still possible to get a home loan. For most, credit damage is the result of being unable, rather than unwilling, to pay one’s bills. By faithfully maintaining and growing a savings account you will be less likely to find yourself in a position where you are unable to pay your bills.