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March 3, 2022
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The Pros and Cons of Federal Housing Administration Loans or FHA Loans in NJ

Ready to buy a New Jersey home but don’t have a down payment saved? Your homeownership dreams are still within reach with a Federal Housing Administration (FHA) loan. The United States Federal Housing Administration provides financial backing for the FHA loan program. However, the Federal Housing Administration itself does not allocate FHA loans. Instead, mortgage lenders provide FHA mortgages on behalf of the Federal Housing Administration.

The FHA loan program is designed to ensure that home buyers with limited financial savings and less-than-perfect financial backgrounds retain a pathway to homeownership. The lower financial requirements of an FHA mortgage also make the program favorable to first-time homebuyers and homebuyers with low to moderate-income (high-income borrowers can also qualify for an FHA loan).

So, read on for a closer look at FHA Loans to determine whether this mortgage program is right for you.

The Pros of Getting a Federal Housing Administration Loan

There are several benefits to securing an FHA loan. Unlike conventional mortgages, FHA loans allow for lower credit scores, lower down payments, grace for past financial challenges, flexible down payment sources, and other benefits.

Lower Credit Score Requirements

Traditional conventional loans often require a credit score of 620 or higher. So, securing a qualifying score for a conventional loan may not be feasible for borrowers with a limited or challenged credit history.

Instead, an FHA loan allows potential borrowers to have a credit score as low as 500. However, the Federal Housing Administration permits FHA lenders to determine their minimum credit scores for FHA mortgages. In addition, borrowers with a credit score that is lower than 580 will have to pay a 10 percent FHA down payment instead of the standard 3.5 percent FHA down payment.

Lower Down Payments

As mentioned earlier, the standard down payment for an FHA loan is 3.5 percent. This is significantly lower than the standard down payment of 20 percent or more required for a conventional home loan.

You won’t have to accumulate a large savings egg to buy a home with an FHA loan. This is excellent news if you are considering purchasing a home in New Jersey. The high average cost of homes in the state may require years of savings to qualify for a conventional mortgage.

Flexible Down Payment Sources

FHA loans allow flexible funding sources for a borrower’s down payment. Borrowers can use gift aid, down payment assistance program funds, and other sources to purchase a home.

Challenged Credit History

Some borrowers have more than enough income to buy a home but may have a less-than-stellar credit history. A past bankruptcy, wage garnishment, or lien may be enough to disqualify a potential borrower from securing a conventional loan. However, an FHA mortgage gives grace to common credit challenges.

The Cons of Getting a Federal Housing Administration Loan

Despite its numerous benefits, there are some downsides to using an FHA loan to purchase a home.

FHA Mortgage Insurance

Securing an FHA loan is less stringent than a standard conventional loan. As a result, FHA borrowers are required to pay upfront and annual mortgage insurance premiums (MIPs). A borrower’s MIP is used to cover the Federal Housing Administration’s risk of providing home mortgages with lower financial requirements.

The MIP for an FHA loan is 1.75% of the borrower’s loan amount for the upfront MIP cost and between 0.45% to 1% annually for the life of the FHA loan. In addition, unless a borrower provides a 10 percent down payment, the MIP for an FHA loan does not expire.

FHA Property Approval

To purchase a home with an FHA loan, a home must meet FHA standards for build and safety quality. Prospective homes for an FHA loan cannot have major build issues that the FHA considers unlivable. These standards are often higher than those required by a conventional loan and may cost you to lose out on your dream home.

Home Borrowing Limits

The FHA has a limit on maximum mortgage amounts that borrowers are allowed to secure. However, this limit is adjusted by location. If you live in an area with a high average home cost, the FHA mortgage limit will be higher than in places with low average home costs.

Using the FHA Loan to Help Achieve Your Home Buying Goals

If you are looking to purchase a home soon but do not qualify for a traditional mortgage loan, the FHA may be the best way to achieve your home buying goals.

Start by identifying where you stand with your credit. Although the FHA permits loans for borrowers with a credit score of 500 or more, the higher your score, the better your FHA loan terms will be.

Think about your monthly financial obligations. FHA loan standards require borrowers to have a debt-to-income ratio (DTI) of less than 50 percent of their pre-tax income. If your DTI is higher than 50 percent, make a plan to lower your DTI ratio.

If your credit score and DTI ratio are well within FHA requirements, the next step is securing down payment funds. The minimum down payment for an FHA loan is 3.5 percent. So, it may be beneficial to determine a home budget first. Then, your budget can be used to calculate how much money you will need for your FHA down payment.

Moreover, if you are a first-time homebuyer or unsure of the home mortgage process, it may be beneficial to find a mortgage broker who can assist you in understanding your options. A mortgage broker can also validate your qualifications for an FHA loan and match you with the best mortgage lender for your needs.

Conclusion and Recommendations

Don’t let conventional mortgage requirements stop you from purchasing the home of your dreams. With the FHA loan program, your financial history and income do not have to act as a barrier to homeownership.

Learn more about qualifying for an FHA loan with the experienced mortgage broker team at Cornerstone Capital Financial Services, LLC. Call us today at (201) 720-6231.