IS 2021 A GOOD TIME TO BUY?
FHA Current Rates
The pandemic has created opportunities and challenges for anyone thinking about becoming a new homeowner. Interest rates are at record lows and working from home gives buyers more options when it comes to where they set down roots.
On the other hand, unemployment is high, and the uncertain economy can make getting approved for a mortgage difficult. So should you buy or not? Here are some things you should know.
Is 2021 a good time to buy a house?
For many first time home buyers it is. Interest rates dropped to historic lows last year, and they are predicted to remain low for the foreseeable future. According to Housingwire.com, FHA rate guide, that means rates in the low 3% range. For home buyers, it means lower monthly mortgage payments and more house for their money.
On the downside, inventory is low and prices are on the rise. House hunting has gotten competitive, and buyers have to decide in advance if they are willing to make an offer over the asking price and exactly how much they can afford to offer.
How do you know if this is a good time for you to start house hunting? Here are some important questions to ask yourself.
Do you have steady income and dependable employment?
Do you have enough money saved for down payment and closing costs?
Is your credit score between 580 and 620 or better?
Do you have a low to moderate debt-to-income ratio?
Buying a home is a long term commitment. If you think you’re ready to take the plunge, but have limited funds and average credit scores, an FHA loan might be right for you.
What are FHA loans?
FHA loans are mortgages that are financially backed by the Federal Housing Administration (FHA). Though they are often utilized by first-time buyers and those with subprime credit, they are also available to well qualified buyers who have owned a home in the past. Because the loans are backed by the federal government, lenders are willing to take a chance on home buyers who might not qualify for conventional mortgage loans.
What’s the difference between FHA loans and conventional loans?
Qualifying for FHA loans is easier.
Qualifying credit scores are lower for FHA loans.
Monthly insurance payments may be lower with FHA loans.
FHA has more liberal rules for gifts of money for down payments.
FHA loans require an upfront mortgage insurance premium and more complicated appraisals that can make closing costs higher than conventional loans.
Check out BusinessInsider.com for an FHA rate guide.
Do FHA loans have price limits?
Yes, but the amounts vary depending on where in the country you live. For 2021, the FHA has set a price limit range between $356,362 and $822,375.
In counties where the median home price is considered low, like Tuscaloosa County, Alabama for instance, the price limit is $356,362. Their average home value in 2020 was $174,000 according to Zillow.com. In San Francisco, California, where the median home listing price is $1.3 million according to Realtor.com, the FHA price limit is $822,375.
To find out what the FHA price limit is in your county, you can visit HUD’s FHA Mortgage Limitswebpage.
How do you qualify for an FHA loan?
You must meet FHA’s minimum requirements to qualify for an FHA loan. In addition to these requirements, the lending institution may have additional stipulations you must meet prior to loan approval.
Credit Score
If your credit score is 580 or higher you can qualify for a 96.5% FHA loan. If your credit score falls between 500 and 579, you may qualify for a 90% loan. Many lenders require your credit score to be 620 or above to get the best rates and the lowest down payment. Individuals with credit scores below 500 are not eligible for FHA loans.
Debt-to-Income Ratio
To qualify for an FHA loan, your debt-to-income ratio can’t be more than 50%. To find out what your debt-to-income ratio is, divide your monthly debt total by your gross income.
If you have a student loan that’s currently deferred, the underwriter will add 1% of the loan amount to your monthly debt. If you have other types of deferred loans, the underwriter will add 5% of the loan amount to your monthly debt.
Down Payment
If your credit score is 580 or higher, you may qualify for a 3.5% down payment. If your credit score is between 500 and 579, you’ll have to make a 10% minimum down payment. The good news is FHA allows you to use a monetary gift for your down payment. You’ll need a letter from the donor with contact information, the gift amount, the donor’s relationship to you, and a statement saying the money is a gift and not a loan.
More good news: There are down payment assistance programs in most states to help first time home buyers. Some are in the form of deferred loans and others are grants with no repayment requirements.
Mortgage Insurance
Every FHA loan requires mortgage insurance to protect the lender in the event you default on your loan. There is an upfront payment requirement of 1.75% of your loan amount. You can pay this at closing or roll it into your loan amount. In addition to the upfront fee, you will have to make a monthly payment of 0.45% to 1.05% of your loan amount annually.
If you can make a 10% down payment, you may be able to eliminate your mortgage insurance after 11 years. If you make a down payment of less than 10%, you’re looking at mortgage insurance payments for the life of the loan.
Property Appraisal
The FHA has minimum property requirements whether you are buying a single family home, a multi-family home, a condo, or a manufactured home. In order to get loan approval, the property must meet the FHA’s basic liveability and safety standards.
In order to determine eligibility, the property you are purchasing must be appraised. An appraisal should not be confused with a home inspection. They are two separate things.
How do you apply for an FHA loan?
In order to complete an FHA loan application, you will need certain documents. They include, but are not limited to:
Your Social Security Number
Proof of citizenship or legal residency, proof of right to work in the United States
Bank statements for the last 30 days including deposits (pay stubs)
Credit reports, employment records, and tax records may be retrieved by your lender
Is there a downside to FHA loans?
If you don’t have the funds to make a 10% down payment, you may have to pay mortgage insurance for the life of the loan.
The FHA requires the property to meet stringent health and safety standards.
You cannot exceed the price limits set by the FHA. That means no jumbo loans.
Lender requirements may differ from the FHA’s minimum standards.
