With low mortgage rates and so many options for home styles, now is an exciting time to be a first-time homebuyer. Because there is significant buyer competition in some price ranges, it is important to be properly prepared when you decide to begin your search. Working with a mortgage consultant on determining home affordability, loan types and getting pre-approved for a mortgage will help you prepare for finding the perfect place to call home.
1. Lower down payment minimum 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 down payment at closing, but it is typically lower than the traditional 20%. A relative may also gift the 3.5 percent down payment. Because they accept a lower down payment, 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
Typically, FHA loans allow more flexibility in credit scores than other types of loans. Keep in mind: lenders vary in their requirements for all loans, including FHA. 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% down payment but can afford monthly mortgage payments of a certain amount.
FHA loan limits vary from county to county and is typically higher in the Twin Cities metro area than non-metro counties. 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 5% down payment saved ($16,000 in this case), you would apply for an FHA loan of the remaining amount, $304,000.
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.