First-time home buyers remain attracted to FHA mortgages as their loan of choice in financing. LendingTree reported in 2013 that 78 percent of all FHA loan applicants were buying their first home. The trend continues four years later as loan seekers are finding the FHA benefits of low down payments, ease of qualifying and low closing costs.
Since it was established in 1934, the FHA-backed mortgage has helped Americans into 34 million homes. The Department of Housing and Urban Development (HUD) reported to Congress in December 2016 that FHA loans approved during the fourth quarter were up by 14 percent over the previous.
FHA Features Attract First-time Buyers
- Down Payments
Favorable down payment requirements are especially attractive to first-time buyers. The FHA down payment on one-four unit properties can be as low as 3.5% of the purchase price. For buyers purchasing a multi-unit home (duplex, triplex, four units) the rent they charge on the additional units can be used to help pay off the mortgage. The borrower is required to live in one of the multiple units. LendingTree's FHA Loan Calculator shows consumers what they can expect for monthly mortgage payments.
- Eased Credit Score Requirements
While the average credit score for approved FHA mortgages this quarter was 679, borrowers can qualify for an FHA mortgage with scores as low as 500. For consumers with lower credit scores, the FHA may accept a higher down payment coupled with personal mortgage insurance.
- FHA Mortgage Rates
Interest rates on FHA mortgages are typically lower than those levied on conforming loans. Rates during December 2016 were as low as 3.45%. LendingTree's Rate Calculator lets potential borrowers compare current live interest rates on FHA mortgages.
- Affordable Closing Costs
Under FHA, sellers can make their homes more attractive by paying up to 6% of the loan to cover buyer's closing costs. That's compared to the 3% allowable under conventional mortgages.
Mortgage Insurance Requirements
On the negative side, first-time home buyers will discover that FHA lenders require mortgage insurance. This includes an upfront payment along with monthly installments. The upfront payment can be rolled into the loan and typically costs 1.75% of the total home loan. The annual mortgage insurance premium is paid in monthly installments and is based on the loan size, the loan term, and the borrower's loan-to-value (LTV) ratio. The average borrower loan-to-value ratio for the fourth quarter of 2016 was 93.4%, according to HUD.
FHA Loan Limits
The FHA sets loan limits annually on the total mortgage amount it will insure. There is a standard national limit as well as a limit adjusted upwards to account for high-priced neighborhoods and counties. For 2016, the standard national FHA loan limit was $625,500. First-time FHA home buyers can search maximum loan amounts for their zip code at LendingTree.
The gift incentive on FHA loans may make these mortgages especially attractive to younger, first-time home buyers with support from their families. FHA provisions allow parents, family members, employers or friends to "gift" the 3.5% down payment for the loan. It's easy to see why an FHA loan remains as one of the most popular resources for those just starting out on homeownership.