Three Important Differences Between A First-Time-Home-Buyer Loan And A Traditional Mortgage
As an aspiring new homebuyer, you may be daunted by all the requirements you hear of, such as having a FICO score of 750 or having a 20% down payment saved up. But fortunately for you and other young people looking for a home, the FHA offers loans just for people in your situation who want a home but who may not have a long credit history and who may still have lots of student loan debts. Here are three differences that set this type of loan apart from more conventional mortgages.
1. You aren't expected to have such an established credit history
As long as your credit score is 500 or more, you're likely to be eligible for this type of loan, even with a poor credit history. If you have nothing but a student loan on your credit history, for example (having more varied accounts increases your credit score) or if you've defaulted or missed a payment on a student loan (which has a very big effect on credit score), you may find it difficult to apply for a traditional mortgage because lending institutions may prefer borrowers with better histories at paying loans back. But an FHA loan can actually get you great terms (such as a low down payment and low interest) with a relatively low credit score.
2. You don't need to save as much money for the down payment
With an FHA loan, you can buy your first home with a down payment as low as 3.5% if you have an okay credit score and as low as 10% if you have a fairly low credit score that's still above 500. This is in contrast to traditional home-buying expectations, which generally include saving up for a 20% down payment before applying for the mortgage.
3. There are limitations and rules
Of course, all these great benefits don't come completely free. You'll have to use a lender that the FHA will agree to work with, since FHA insurance is the reason your lender is agreeing to work with you on such favorable terms. In addition, you'll have to pay for two types of mortgage insurance to make up for the risk
Remember, just like a traditional mortgage, a first-time-home-buyer loan can still lead to having your house reclaimed if you don't stay on top of the payments. For this reason, it's a good idea to underestimate the amount you'll be able to pay monthly and to make sure you have enough savings to live on for six months (in case of unemployment or injury) before buying a house.
For more information, contact a company that offers home mortgages.