How to Buy a Home with a Small Down Payment: The Advantages of Using FHA Financing
It usually takes many years of penny pinching, sacrifice and firm self control to save enough money to buy a house. Many Americans end up using their life savings to pay for the costs associated with a home purchase. If you also have less than perfect credit, it may seem impossible to get set up with a mortgage. For people in this type of situation, a mortgage program known as FHA financing exits. These are mortgages that are insured by the Federal Housing Authority and therefore backed by the government. The program is designed for borrowers who may have a lower credit score and who may not have the funds to make a larger down payment typically required for conventional loans.
When you use an FHA loan as your means for financing, you only have to come up with 3.5% of the purchase price as a down payment. This will allow potential home buyers to reassess what kind of house they can afford and possibly let them purchase something more accommodating for their family. The low down payment will also allow buyers to keep more reserves in the bank as well; they can then afford the necessary maintenance on their new home when something needs replacement.
Even if you can’t come up with the funds for the small down payment, FHA financing does allow for a non-occupant co-borrower to contribute funds if they cosign the mortgage. This will also help if you have a relative willing to assist you in the event your income isn’t enough to keep your debt to income ratio below 50%. That is the highest percentage most lenders will allow it to escalate to while still approving your application.
While the down payment is usually the largest demand on a prospective buyer’s purse, closing costs are not cheap either. These usually range from 3-6% of the purchase price and add up quickly. Thankfully the FHA loan has a measure to combat this cost as well; it’s known as sellers assist. The sellers assist condition allows the property’s owners to contribute up to $10,000 towards closing costs. This can then absolve the buyers of the need to provide more up front capital.
Besides saving thousands on the down payment, you will also be able to save throughout the life of the loan by obtaining a lower interest rate. As of 2012, interest rates for FHA loans are hovering around 3.75%. It’s rare to be able to score a rate that low with questionable credit and a small down payment. The savings you get by locking in a lower rate will compound over the years and save you thousands of dollars.
If you decide to go with an FHA mortgage, you will likely be able to take advantage of the lower mortgage rates in today’s market. You won’t have to worry about busting your budget over several years to save for a down payment, and will even have the sellers assist tool or a cosigner available if necessary. This loan program is intelligently designed to enable lower income earners to make the home of their dreams a reality.