“I can’t put 20% down and I’m not selling my kidney on the black market to get a down payment. What are my options?”
Don’t pull a Walter White because you don’t have the ideal down payment.
A FHA loan is a mortgage loan issued by a FHA-approved lender and insured by the Federal Housing Administration, an agency within the U.S. Department of Housing and Urban Development. It’s known for more flexible borrower requirements, where FHA lenders analyze borrowers in a holistic way rather than writing off candidates because of a single figure. For instance, if you declared bankruptcy a few years ago, but you can prove that you’ve cleaned up your financial act (in the form of on-time rent or credit card payments, for instance) an FHA-approved lender will take your improved money habits into consideration.
What are the perks to a FHA loan?
- Low to moderate-income buyers with decent credit (or not so great credit- minimum credit score is currently 580) can put as little as 3.5% down on a future home with a FHA loan.
- The seller or lender also pays 6% of the buyer’s closing costs on the home.
- You can also tack on a Section 203(k) loan if you need cash to make repairs to your home; the loan amount is calculated on the projected value of the home post-repairs and can be wrapped into your mortgage payments.
Sounds pretty sweet- and it is for most people- but there’s a few catches:
- Borrowers are required to shell out for mutual mortgage insurance (MMI): an upfront premium of 1.75% of your total loan as well as 0.85% annually until you have 22% equity in your home (that would be a 78% LTV).
- The house must be a permanent residence and owner-occupied.
- Loans are limited to a max of $271,050 (or up to $625,000 in high cost areas like New York and Los Angeles);
- You must have at least two years of steady employment in the same line of work to qualify.
- If your home appraises above the purchase price, you’ll need to put more cash down to make up the difference in price.
Lenders may also charge a higher interest rate on the loan if they agree to pay your closing costs, so take your time and shop around to find the best possible conditions for you.
Check your state and local governments to see if you qualify for any helpful home buying programs, like down payment assistance. In New York, for example, the New York State Homes and Community Renewal agency lists affordable homes and funding opportunities for veterans. You can also visit the U.S. Department of Housing and Urban Development to find an FHA-approved lender in your area.