If you’re preparing to buy your first home in the Houston area or nearby and are seeking a loan program that requires a low down payment, your loan officer might suggest an FHA loan. The FHA mortgage program has been around since 1934 when Congress formed the Federal Housing Administration under the Department of Housing and Urban Development.
One of the more common requirements before FHA was a sizable down payment. Banks could require a down payment of 30, 40 and even 50% of the sales price of the home which kept many out of homeownership altogether. The FHA mortgage program changed all that. If an FHA loan might be in your future, here are three things you need to know about an FHA mortgage that only asks for 3.5% down.
It’s For a Primary Residence Only
FHA loans are government-backed loans but unlike a conventional mortgage, an FHA loan can only be used to finance a primary residence. The program was designed to promote home ownership and not used to fund real estate investments. Conventional loans can be used to finance a rental property or a vacation home, but FHA guidelines restrict occupancy to a primary residency. However, you can use the FHA loan to buy a duplex or 2-4 unit properties and rent out the other units while you occupy one of them.
There’s a Guarantee
The US government guarantees all FHA mortgage loans. This guarantee is not an approval for the borrower, it’s a guarantee for the lender that underwrites the loan. This protects the lender if the borrower does not fulfil the loan requirements. For this guarantee, FHA loans have two forms of mortgage insurance. An upfront premium that is rolled into the loan and an annual premium that is paid in monthly installments. Conventional loans have no such guarantee.
An FHA loan does allow a financial gift from a family member or qualified non-profit to assist a borrower with the down payment requirements and closing costs. There are specific gift documentation requirements that are mandated by FHA, but this allows a borrower to purchase a home with little or no money of their own. This is a great way for a family member to help a loved one purchase a new home.