FHA home loans

Home Buying Myths Busted

5 Common Home Buying Myths Busted

There is so much to consider when buying your first home. Advice often pours in from well-meaning parents and friends, which can contradict what you’ve read in your online research and received from your mortgage lender and real estate agent. What we do know is that licensed mortgage lenders and real estate agents are the professionals you should turn to for specialized advice and who we have turned to debunk these five homebuying myths.

1. You must have a 20% down payment.

While a 20% down payment can keep you from paying private mortgage insurance on a conventional home loan until you have obtained 80% equity, you can qualify for a home loan with a much lower down payment.

With a good credit score, you can purchase a home with a conventional mortgage with a 3% down payment. FHA home loans will accept a 3.5% down payment. VA home loans and USDA home loans have a zero down payment requirement, but they have additional lending criteria.

2. The down payment is the only money that needs to be put down to qualify for a home loan.

Saving for a down payment is often the focus for first-time homebuyers, but more funds are required to cover additional fees and closing costs. Homebuyers are responsible for the cost of the home inspection, home insurance, property taxes, and closing costs which are approximately 4% of the purchase price. If you get pre-qualified for a home loan with a reputable mortgage lender, they will provide a home budget and estimate your additional costs.

3. You must have a high credit score to qualify for a home loan.

The average FICO® score on all loans closed in February 2021 was 753, according to the Origination Insight Report by Ellie Mae. While lending criteria have tightened this past year, and a higher credit score will help you receive a lower interest rate and loan terms, don’t despair if your credit score is less than perfect. There are still many mortgage loan options for home buyers with lower credit scores.

Here’s a guide to the minimum credit scores for the four most common home loan programs. Each mortgage lender will have their own lending criteria.

  • Conventional loans usually require a 620 minimum credit score, but a higher credit score can help you to receive the lower “advertised” rates.
  • Depending on your down payment and debt-to-income ratio (DTI), you can qualify for an FHA home loan with a 580 credit score, and maybe even lower with a higher down payment. Still, most lenders will require at least a 620 credit score.
  • Most lenders require a minimum credit score of 640 for a USDA loan, though some may go as low as 580.
  • The Department of Veterans Affairs doesn’t technically have a minimum credit score to qualify for a VA home loan, but most lenders will require a minimum credit score between 580 and 620.

4. There’s a perfect time of year to buy a home.

Spring is often seen as the best time of year to buy a home. It is often the most competitive time to search for a home, which can drive up prices. Warmer weather is more conducive to house hunting, and families want to get settled in a new home before the new school year. Winter, particularly around the holidays, is often less competitive but usually has less inventory. Additional factors such as interest rates and location can also impact the market any time of the year.

The best time to buy a home is when you are financially prepared. You have been pre-qualified with a mortgage lender and have received a home purchase budget. A mortgage lender will provide a savings goal for your down payment and closing costs, review your credit score and credit report, and advise what your debt-to-income ratio should be. Ideally, you will have some additional savings to cover moving, furnishings, your first few mortgage payments, etc. When you have met these criteria, then that is the perfect time to buy your home.

5. You do not need a home inspection.

Home inspections are optional. If you are buying a home in a competitive market, it might be tempting to waive your right to a home inspection to make your offer look more attractive to the seller, but this could be a costly mistake. The home inspector works for you and will identify any potential issues with the property before committing to the purchase.

A licensed home inspector will provide a complete report of the home’s condition, such as the foundation, electrical wiring, plumbing, age and condition of the roof, HVAC system, etc. If the home inspector identifies any issues during the home inspection, you can use the report to request the seller to make the repairs or to negotiate a lower purchase price for you to make the repairs before purchase.

FHA Increases 2021 Home Loan Limits

Homebuyers wanting to purchase a home with a lower down payment or credit score in 2021 can now finance a higher cost home. The Federal Housing Administration (FHA) has announced a 7.4% increase to the low-cost and high-cost area loan limits for FHA home loans financed in 2021 for 3,108 counties across the nation. In 125 counties, FHA’s loan limits will remain unchanged.

As of 1 January 2021, the FHA low-cost loan limit will increase to $356,362 for one-unit properties.

The 2021 FHA loan limit for one-unit properties in high-cost areas will be $822,375.

The FHA has adjusted loan limits for properties purchased in Alaska, Hawaii, Guam, and the U.S. Virgin Islands to account for higher construction costs, so properties in these areas have a ceiling of $1,233,550 for a one-unit property.

Click here to see the 2021 FHA loan limits for your county.

How is the FHA home loan limit determined?

FHA is required by the National Housing Act, as amended by the Housing and Economic Recovery Act of 2008 (HERA), to set Single Family forward loan limits at 115% of area median house prices. FHA calculates forward mortgage limits for a Metropolitan Statistical Area based on the county within the MSA having the highest median price.

The FHA sets its 2021 low-cost area mortgage limits at 65% of the national conforming loan limit of $548,250 for a one-unit property.

The FHA national high-cost area mortgage limits for 2021 are set at 150% of the national conforming limit of $548,250 for a one-unit property.

 

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