During the buyers’ market that ended more than two years ago, numerous real estate investors swooped in to purchase low-priced homes, many of which were foreclosures and short sales. First time homebuyers and other traditional buyers were, in many cases, locked out of the market by these investors, who were outbidding them, and often paying with cash rather than financing.
Now, as home prices rise and foreclosures and short sales dwindle, the investors are exiting the market. What does all this mean for first-time homebuyers who have their eye on single-family homes? With fewer investors, and lenders slowly loosening their standards, the competition for a single family home is finally becoming an even playing field. Below, we walk you through why it’s the best time in years to be a first-time homebuyer in Minnesota and western Wisconsin.
1. Down payment minimum of 3.5 percent for FHA loans
FHA loans, which are backed by the Federal Housing Administration, are the most common government-backed loans. Lenders who want FHA protection must make sure that their loans meet FHA lending standards.
FHA loan standards require a buyer to have a minimum of 3.5 percent down at closing. A relative may also gift the 3.5 percent down payment. With such a low amount required down, FHA loans are considered riskier to lenders than conventional loans. To protect against borrowers defaulting on their mortgages, lenders require buyers to purchase mortgage insurance when they secure an FHA loan.
2. Minimum credit score for FHA loans
Most lenders require a credit score of 640 or higher to secure a loan, though exceptions are occasionally made for scores higher than 580. It’s a common concern that lenders will begin offering mortgages to borrowers who should not be approved. Keep in mind: the FHA states that they will buy loans for borrowers who have a credit score higher than 500. But major lenders, who underwrite the loans, have requirements that are often stricter than FHA standards. These requirements are called “investor overlays,” and can include everything from checking buyer credit scores to verifying income.
Much like mortgage insurance, the investor overlay provides additional safeguards for lenders who want to protect against buyers defaulting on their mortgage payments. By checking for signals like a growing income or other financial security factors, lenders can confidently lend to first time buyers who may still be working to improve their credit score.
3. Loan limits for FHA and conventional loans
Both conventional loans and FHA loans have maximums, or limits, to what can be borrowed. Why? In the case of FHA loans, they are considered “helper” loans for buyers who don’t have a 20 percent down payment but can afford monthly mortgage payments of a certain amount.
FHA loan limits vary from county to county. In the Twin Cities metro area, including Anoka, Carver, Dakota, Hennepin and Ramsey counties, the current loan limit on single-family homes is $318,550. Meanwhile, the FHA loan limit for single family homes in most non-metro counties in Minnesota is $271,050. You can double check your county’s loan limit for Minnesota and Wisconsin on the FHA website.
Remember, the FHA loan limit is for the total amount of the loan, not the total price of the home. So if you’re eyeing a gorgeous home in Fridley with a price tag of $320,000 and you have a 4 percent down payment saved ($12,800 in this case), you would apply for an FHA loan of the remaining amount, $307,200.
4. How to get started
The best thing you can do as a first-time homebuyer is to get pre-approved for a mortgage. Your home mortgage consultant can walk you through this mortgage application process, and you’ll supply your full financial history. In return, the lender will provide an estimate of the loan amount they would approve and what interest rate you can expect should rates hold. Buyers with pre-approval are also looked on favorably by many sellers, so it’s a great tool to have in your arsenal as you head into our competitive, low-inventory market.