Should I Choose an FHA Loan to Buy My New Home?

Financing your new construction home requires time, organization, and an understanding of the various options available to you as a borrower. One of those options is an FHA Loan, provided by the Federal Housing Administration. With a variety of benefits designed to help streamline your home purchase, you may just find that the FHA Loan is the right choice for you.

FHA Loans

FHA Loans make up about 20% of all home loans in the United States. That makes them among the most popular loan products available. There are many reasons that this type of mortgage works so well for so many borrowers.

Benefits of FHA Loans

FHA Loans are designed to work for a variety of home buyers and purchase scenarios, helping to streamline the home loan process in order to make home ownership possible for more Americans. Here are just a few of the benefits of FHA Loans:

• FHA Loans require lower down payments than other loan products -- in many cases as low as 3.5%. This makes them ideal for first time homebuyers who have not yet had time to save up the 20% down payment required for most conventional loan products.

• FHA Loans are available for borrowers with FICO scores as low as 500. Even home buyers who have experienced a bankruptcy or foreclosure may qualify.

• FHA Loans work for a variety of borrower scenarios, including construction loans, energy efficiency loans, and refinancing loans. In addition, along with the 30-year fixed mortgage, you can obtain a 15-year term for a faster payoff.

• FHA Loans allow you to obtain your entire down payment from gift funds. That means that if your parents or other family members want to provide your down payment, you can still get approved for an FHA loan.

There are many FHA-approved lenders, allowing you to shop around for the best rates and terms for your loan.

FHA Mortgage Insurance Premiums (MIP)

Mortgage insurance premiums allow the FHA to offer their many benefits and favorable terms. You are required to pay mortgage insurance premiums (MIP) each month, but you can reduce the amount of MIP you pay with a 15-year-term loan or with a higher down payment amount.

In addition, once you have built up equity, you can refinance your loan as a conventional mortgage. This may allow you to forego mortgage insurance altogether, saving you money on your monthly mortgage payment.

Home Loan Process

Your home loan process will involve a number of steps designed to help you gather the information you need and understand your options.

Pre-qualification

Pre-qualification is the first step in acquiring a home loan. It normally involves a brief conversation with a lender, answering some general questions designed to give you an idea of the loan amount you might qualify for.

Pre-approval

Pre-approval is a process during which you will gather and submit financial records including income statements in order to obtain a preliminary approval from a lending institution. The pre-approval process can help you determine how much money you can actually expect to obtain in a home loan and what the basic terms will be.

Underwriting

The underwriting process involves the submission of additional paperwork and financial records as well as information for the property you are purchasing. It is designed to ensure both the financial fitness of the borrower and the condition of the home before final approval.

Closing

Once you receive the “Clear to Close,” you will schedule a closing process in order to finalize the signing of your loan documents and the details of the home purchase. At the closing, you will also provide the balance of your down payment and any associated closing costs and fees.

Different Home Loans

Besides the FHA Loan, there are a variety of other loan products designed to help you find the right financing option for both your short-term and long-term needs. These can include:

• Conventional Loans

• Veterans Administration (VA) Loans

• Interest-only Mortgages

• Adjustable Rate Mortgages (ARM)

• Balloon Mortgages

• Jumbo Mortgages

• Combo/Piggyback Mortgages

Each mortgage type has its advantages and disadvantages and each can work for different borrowers.

For example, veterans and their families can take advantage of the many benefits of the VA loan, including no down payment and a guarantee from the Department of Veterans Affairs.

An interest-only mortgage can provide an affordable alternative to a conventional mortgage, requiring you to pay only the interest on your loan with principal payments of your choice. After the first 5-10 years, the mortgage converts to a more traditional principal payoff scenario.

Working with an experienced and well-qualified lender can help you compare and contrast the pros and cons of each of the mortgage scenarios for which you qualify. Consider a variety of alternatives in order to get a sense of which one will work best for you.

Special Grants and Programs

There are a wide variety of special grants and programs that can help cover all or part of your down payment, closing costs, and other charges associated with your home purchase. Your lender is a great resource for these and can help guide you through the application process.

Trying to decide which mortgage option is right for you? We have the advice, resources, and lending professionals you need to make all of the right choices. Whether you choose an FHA Loan or one of the other available mortgage options, you’re sure to find a loan that fits your financial needs.

Contributed to Your Home blog by Christy Murdock Edgar

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Published 10.21.19