Buying a home with an FHA loan

As a first-time home buyer, coming up with a lot of cash for a hefty down payment can seem like an impossible task. Luckily for new buyers, there are several programs that help soon-to-be buyers come up with the funds for a down payment. An FHA loan is one of the more common loan programs that's tailored to first time buyers. Keep reading to learn about the program and requirements necessary to qualify for a home loan through FHA.

What is an FHA loan?

FHA loans are backed by the Federal Housing Administration and allow borrowers with a low credit score and little money down (typically 3.5%) the ability to buy a house. 

What credit score do I need to finance my home through an FHA loan?
As a general rule of thumb, you need to have a credit score of 500 or more. However, to qualify for the 3.5% down payment your credit score needs to be 580. Borrowers with a credit score below 580 can expect to be on the hook for a 10% down payment. Make sure to talk with your lender if you're interested in an FHA loan-- they can check on your credit score and let you know what type of down payment option might work best for you, given your score.

FHA loan and PMI
Because you're not coming to the closing table with the traditional 20% down, lenders will require you to pay PMI or Private Mortgage Insurance. Essentially, since you're not putting a lot of money down, lenders want protection should you decide to default on the loan.

PMI can be paid monthly or at the time of closing and is typically .5 to 1% of the original loan value. So on a $200,000 home, you can expect to pay $83 to $166 per month. The amount you'll end up paying is tied to your credit score, too. The good news here is that once your mortgage hits an 80% loan to value ratio you can call to have PMI cancelled.

Advantages to an FHA Loan

•  Great for borrowers with low credit
  
• First time home buyers can easily purchase a home with the low down-payment options
• Easier to qualify for

Disadvantages to an FHA Loan

• Borrowers must pay Private Mortgage Insurance
  
• Only available for homes that will be used expressly for your primary dwelling
• Must pay an upfront mortgage insurance premium at closing

FHA loan requirements 

• Proof of reliable income. Last two paystubs and tax returns will need to be given.
• Must put down a minimum down payment of 3.5% of the total purchase price. You may use gift funds towards the downpayment. 
• Must have a minimum credit score of 500 to qualifiy. Borrowers with a credit score of 500-579 will be required to put down 10%.
• Must agree to have home appraised by an approved FHA home appraiser.
• Borrower's debt-to-income ratio must be below 43%.
• Borrower must be planning to use the home as their primary residence. 

Keep reading for  more information about FHA loans and other loan programs for buyers in North Carolina.