Despite their popularity, FHA loans remain somewhat of a mystery for most prospective homebuyers. There are many myths that surround these loans because loan approvals were once much more stringent than they are today. First of all, FHA loans are not just for first time homebuyers nor are there any minimum or maximum income requirements. No longer is a pest clearance required; furthermore, septic system and well reports are no longer required either. Underwriting is more lenient than conventional loans; for example, FHA loans accept lower credit scores and higher debt-to-income ratios than conventional loans.
With today’s increasing home prices, decreasing home inventory and stagnant wage appreciation, prospective homebuyers need all the help they can get in order to qualify for the mortgage required to buy a home. FHA loans maximize a homebuyer’s purchasing power by providing lower 30 year fixed interest rates, offering lower mortgage insurance premiums than conventional loans and they provide exceptionally low down payment requirements. It is said that the biggest barrier to entry for first time homebuyers is coming up with the cash to cover the down payment and closing costs. FHA loans require a minimum down payment of 3.5 percent of the sales price of the home and FHA also allows the homebuyer to receive a gift of cash from a close relative to help cover the cash requirements. The seller may also pay all or some of the buyer’s closing costs.
FHA loans are not for everyone and there are some downsides: there is an upfront mortgage insurance premium that must be paid that equals 1.75 percent of loan amount but it can be paid by increasing the mortgage amount and, unlike with conventional loans, the monthly mortgage insurance premium must be paid for the life of the loan. The only way to escape the monthly mortgage insurance premium is to refinance out of an FHA loan. The maximum FHA loan amount in a high priced housing market like Santa Cruz County is $636,150.
Prospective homebuyers are well advised to seek the advice and services of a mortgage professional who has experience with FHA loans. FHA loans are not the right fit for everybody but you will never know your best option for a mortgage unless you are working with a local and knowledgeable lender who is familiar with all of the mortgage products.