This year’s first-time homebuyers are currently set up for the optimal time to buy a home. Not only are mortgage rates near record lows but changes to FHA loans are increasing affordability for first-time buyers.
In January 2015, the FHA reduced its mortgage insurance premiums (MIP) for the first time since 2001, creating a more attractive option for first-time homebuyers in need of home financing. Effective as of January 26, 2015, the U.S. Department of Housing and Urban Development (HUD) lowered annual FHA mortgage insurance premiums by 50 basis points from 1.35% to .85% on 30-year fixed rate mortgages for new FHA loans of $625,000 or less.
The HUD is predicting the new MIP change to spur 250,000 homebuyers to purchase their first home in the next three years.
FHA Advantages for First-Time Homebuyers
The FHA is the largest insurer on mortgages in the world and typically one of the easiest types of loans to acquire. Though repeat homebuyers can finance with an FHA loan, it is commonly referred to as a “first-time homebuyer loan”, because of the many ways it benefits first-time buyers, including:
- Allowance of less than-perfect-credit. Credit score and credit history tends to be a hurdle for many first-time buyers. Borrowers who have low credit or limited credit history may still qualify for an FHA loan, pending multiple factors.
- Small required down payment. The most commonly cited obstacle for first-time homebuyers is the ability to save funds for a down payment. Buyers only need to provide 3.5% of the purchase price for an FHA loan. A bonus is that the down payment can be gifted from a family member or a grant from a state or local government down payment assistance program.
- All eligible borrowers qualify for the same interest rate. With conventional financing, credit score and down payment affect the interest rate a borrower receives. If a borrower qualifies for an FHA loan, they receive the current standard interest rates, which are very competitive and often lower than the rates of conventional loans.
- Higher seller contributions. FHA loans also allow for higher seller contributions than most conventional loans; 6 percent in comparison to 3 percent. This means a borrower can negotiate with the seller to pay for most, if not all, of their closing costs, minimizing out-of-pocket expenses.
- Lower mortgage insurance premiums. The lowering of FHA mortgage insurance premiums saves homebuyers hundreds of dollars each year and increases affordability. With the new change, a homebuyer financing a $150,000 home with a 3.5% down payment would save approximately $60 a month with the new MIP rate.
The best way to determine which loan is right for you is to contact a mortgage banker to discuss your loan options and eligibility. For more information about home buying and financing, in general, download our Mortgage 101 Handbook, a go-to guide on everything involving buying your first home.