Save Out-of-Pocket Costs with an FHA loan
Buying a home can quickly become expensive with the numerous out-of-pocket costs. If a first time homebuyer purchased a home for $350,000 near the Seattle metropolitan area with a conventional loan, they could expect to pay a 20% down payment on top of closing costs which would mean an out-of-pocket expense of at least $77,000 for the buyer.
However, for first-time buyers, a Washington FHA loan can increase their home buying power allowing them to save money while purchasing the first home. FHA loans offer an average mortgage rate between 4-5% and a required 3.5% down payment – 16.5% less than a conventional loan. Even with these low numbers, buyers in Washington can still receive a loan ranging from 217,000 to $400,000 depending on the area they are looking to buy in.
How else is a FHA loan going to save me money? In addition to a 3.5% required down payment and competitive monthly mortgage rates, FHA loans provide eligible buyers other benefits to prevent high out-of-pockets expenses:
- Regulated closing costs
- Down payments that can be made in the form of gifts
- 3% of the sales price can be credited towards buyer costs
- Integrated mortgage insurance
With these benefits, a buyer who would normally have to put $60,000 down on a $300,000 home with a conventional loan would only have to put $10,500 down on the same home with an FHA loan. Closing costs, which range from 1-8%, can be a huge out-of-pocket expense for a buyer, however, with an FHA loan, a buyer can roll those costs into their mortgage, and not see a penny out of pocket.
Do I qualify?
Even when a borrower doubts their eligibility for an FHA loan, he or she is always encouraged to submit an application. Borrowers should meet the following minimum requirements to be eligible for an FHA loan:
- a mid-range credit score of at least 620
- consistent employment for two years
- income remaining the same or increasing for at least two years
- a perfect credit rating two years after claiming bankruptcy or foreclosure
To quicken the application process, prospective buyers should obtain a credit report prior to the application process. By reviewing your credit report before meeting with a loan officer, buyers can clean up their report to provide the best credit score possible. A better credit score can determine whether or not a buyers saves hundreds every year through mortgage rates, and will provide them with better loan terms.
> 6% of the sales price can be credited towards buyer costs
I believe this has been changed recently to only 3%
Robert Boyer
WJB Home Loan
Investment Property Search
San Diego Real Estate Homes for Sale
Thanks Robert for catching that. I stand corrected (and made the correction)! :)
FHA market share has definitely increased in the last 3 years. As of today, FHA still allows for a 6% seller contribution limit. Earlier this year, HUD proposed a 3% limit, but that change has neither been approved or implemented as of today. Implementation was speculated to be summer 2010, but nothing more has been mentioned in months now. Only on a refinance, can closing costs be rolled into the loan amount. On a purchase transaction, the borrower must cover any closing costs/pre-paids not paid for by the seller.
For bankruptcy, the buyer must be 24+ months from a Chapter 7 discharge date. The borrower can still be in a Chapter 13 so long as they show 12+ months of on-time payments and have permission from their bankruptcy trustee. There should be no new derogatory credit since a bankruptcy was filed.
A foreclosure does require at least 36+ months from the foreclosure action date. A default on a student loan or other federally insured debt also requires 36 months from the action date.