When it comes to home buying in New Mexico, there a lot of things to consider. One of the biggest is the type of home loan you will get to pay for your new house. There are three major players when it comes to home loans in today’s world: FHA loans, conventional loans, and VA loans. Today let’s talk about FHA loans.
A FHA insured loan is a mortgage loan backed by the Federal Housing Authority (FHA) and provided by FHA approved lenders. The FHA was established in 1934 during the Great Depression in order to increase new home construction, decrease unemployment, and offer loan insurance for previously under-qualified individuals. Rather than making loans, the FHA insures loans that come from FHA approved lending groups.
The advantages of an FHA insured loan is they’re geared towards first time home buyers, lower income individuals, and those with poor credit. This means the application/approval process is more lenient (lower minimum credit scores, income, and debt to income are acceptable). Additionally, the government insures the loan meaning if the borrower defaults the government covers the loss. Some other advantages include:
- Low Down Payment: A typical down payment with this sort of loan is somewhere around 3.5% of the total sales price (for credit scores of 580 or higher). So for a $150,000 home you would be paying a down payment of about $5,250. Individuals with a lower credit score (500-579) would have to have a minimum down payment of 10%. So, on that same loan amount of $150,000 the down payment would be about $15,000. In addition to a lower down payment, an FHA insured loan allows for friends, relatives, charities, and even employers to “Gift” a contribution towards your home loan.
- No Income Limit: There is not minimum or maximum salary requirements when applying for this loan program. This means that individuals with a higher income, but a poor credit score can potentially qualify for a FHA insured loan.
- Varied Housing Options: Borrows who utilize this loan program are not restricted in terms of housing options. Individuals have a variety of different options to choose from including a single-family detached home, condominium, town home, multi-family home (up to four units), and manufactured housing (as long as it is on a permanent foundation). New construction or houses that need some rehabilitation are options as well if the borrower qualifies for a FHA Construction Loan.
The disadvantage of this sort of loan is borrowers have to pay a mortgage insurance premium (MIP) which adds up quickly, especially when income is already tight. The insurance is paid two ways, upfront during closing and in the monthly mortgage payments. The upfront cost can be as high as 1.75% of the total loan amount. So for that $150,000 home loan the upfront premium could be as high as about $2,625.
In addition to that upfront MIP the borrower would also have to pay the MIP every month with their mortgage. This premium is typically built into the loan amount paid per month. Some other disadvantages include:
- PMI For Life of Loan: If the borrower makes a down payment of less than 10% of the home loan they will have to pay PMI for the entire life of the loan. If a borrower makes a down payment of 10% or more, they will have to pay PMI for 11 years. An individual’s FHA insurance premiums may be eliminated when refinancing the mortgage into a non-FHA loan.
- Selective Housing Standards: Most FHA insured loans have restrictive housing standards meaning the home being financed, must meet the HUD‘s minimum Heath and Safety Standards. So if the home was a bit of a fixer upper and the home loan was not a construction or rehabilitation loan it may not be approved.
- Primary Residence: An individual using a FHA insured loan to purchase their next home must live in the home as their primary residence. This means that the borrower cannot use the home as an investment or vacation home.
- Loan Limits: Borrowers are limited on the loan amount depending on the county they live in. Every year the FHA sets the loan limit so these amounts change based off of place of residence and year. For instance, the current loan limit in Bernalillo County is $331,760 for a single family residence. Higher loan limits may apply for multi-family homes if the applicant is approved.
If you would like more information on FHA insured loans or need help getting financed or starting the loan application process when purchasing a home, contact me today.
Elizabeth Benedict is an Associate Broker and REALTOR® at ERA Sellers and Buyers Real Estate in Albuquerque, New Mexico. She holds a Masters in Literature from the University of New Mexico. When she is not helping her community buy and sell houses she is usually writing.