Only Robert Stack could possibly uncover the mystery that is The First Time Home Buyer Program..until now!
The story you are about to read is true. The names have been changed to protect the innocent, although the details are accurate.
So often people looking to buy a home inquire about the “first time home buyer program”. In reality, the “program” is actually just a reference to the getting an FHA loan. Essentially the marketing department at FHA did a phenomenal job of making their loan program synonymous with buying your first home. And although FHA is extremely popular there are many cases in which there are options for first time home buyers that do not include going the FHA route. We would need to look at your individual situation to see what the best fit is, but for this article we will just focus on what parameters and requirements are generally involved when buying a home through the FHA process. Now would be the time to refill your beverage and get comfortable as it will be tough to pull yourself away for the next 1-3 minutes.
1. Credit Score – An FHA loan will allow you to finance a higher percentage of your home with a lower credit score than going a conventional loan route. A general rule is that with a middle credit score (3 scores are generated by Transunion, Experian, and Equifax and the middle score is used) of 640 you can borrow 96.5% of the sales price of your home. This means that even if your credit report is not exactly worth framing that there is still a way to get a home with a reasonable down payment.
2. Down Payment – If you qualify, you can bring as little down as the 3.5% down to buy your home. A unique feature of FHA is that this 3.5% can be gifted to you by a friend, family member, or anyone else crazy enough to give you that sum of money. The amount you have to bring can also be supplemented buy down payment assistance programs, grants, or community funds so it is always worth researching where you intend to buy to see if any government or state funds may be available.
3. Closing costs – When you buy your home, in addition to your down payment there will also be closing costs involved such as appraisal, title fees, insurance, mortgage taxes, etc. A feature of FHA loans is that many lenders can issue you a closing cost credit based on the interest rate you select. As an example, you may be able to get 3.25% on a 30 year FHA loan, but if you decide to take 3.625% on the 30 year loan the lender will pay $4000 of your closing costs. This can be a good trade off if you want to keep your initial investment as low as possible, so that is always a good option for us to discuss.
4. Interest Rate – Interest rates on FHA loans are lower than traditional financing methods, but they are some factors that can somewhat offset these savings.
a. Mortgage Insurance – The main factor that eats into the savings from a lower interest rate is the rate you pay for mortgage insurance. The mortgage insurance is actually what makes an FHA loan an FHA loan. Some people refer to FHA as government loans, but to describe them accurately would be to call them government insured loans. Essentially the FHA is the one who is providing the insurance on the loan in case of default. As of today the rate for mortgage insurance through the FHA is .85%.
b. Up front mortgage insurance premium – This fancy term is the best way to say “The money FHA is charging you to do an FHA loan”. This amount is 1.75% of your loan amount and is added to the loan you are getting for the home. So you do not have to come with this money out of pocket, but therein lies the largest downside to FHA. If you bring a 3.5% down payment, but the FHA puts a 1.75% fee on top of your mortgage then, in reality, the day you walk into your new home you really only have 1.75% equity in the house. Now if you are planning on being there awhile that may be no big deal, but if you need to sell the home in a short time frame it may come to back to bite you since you will not have a lot of equity built up.
5. Debt ratios – This is a calculation that looks at the total amount of income you have coming in opposed to the amount of debt you have to pay monthly. In general terms, 45% is the maximum ratio for conventional programs, meaning that for every dollar you make $.45 is the max you can be spending on your home and anything else that is on your credit report. Things like utilities, cell phones, insurance, etc. are not included in the 45%. Now with FHA; based upon your credit score your debt ratio can go as high as 55%, but 48% is usually the cap.
So does an FHA loan make sense for everyone? No it does not, but FHA loans can be a great tool to get you into a home and allow you to start building equity and stop throwing money into the black hole that is rent. FHA loan programs in Oklahoma and nationwide have a lot of great benefits, but much like any financial tool it must be evaluated on a case by case basis. Working with a lender that knows all the options and is willing to take the time to speak with you and work out a plan is really the best way to decide which route to buying a home makes the most sense. So if you have any questions feel free to call me about the first time home buyer program…oops I mean an FHA loan.
Mystery….solved.
-Matt Brown
