Buying A Home In California With An Fha Home Loan
Living in California can feel like a dream. Year-round beautiful weather, beaches, mountains and deserts, vibrant cities, and notorious national parks are just some of the fantastic things California offers. Although buying a home in California may seem difficult to some, the Federal Housing Authority (FHA) insured loan program puts the dream of owning a home in California within reach.
What Is An Fha Loan?
The Federal Housing Authority does not lend money; it insures these loans. FHA-approved lending institutions provide the financing for the purchase of a home. Although often used by first-time homebuyers, it is NOT a first-time homebuyer program.
Benefits Of An Fha Loan
The main benefits of an FHA loan for homebuyers are:
- Low down payment
- Higher debt-to-income ceiling
- Below-average credit scores
Fha 3.5% Down Payment
One significant way to build wealth is by buying a home. However, saving a sizeable down payment may not be realistic for many. If your credit score is 580 or greater, an FHA loan only requires a 3.5% down payment. Further, gift of funds from family members or a very close friend, employers or labor unions, charitable organizations, and government or public entities with approved down payment assistance programs are all permissible. If your credit score is lower than 580, but at least 500, you can still access an FHA loan with a 10% down payment.
Requirements Of An Fha Loan
Financing your California home purchase with an FHA loan comes with some requirements.
- Upfront Mortgage Insurance: UFMI is a premium that is 1.75% of the loan amount. UFMI can be paid in cash at the closing of your transaction or financed into the loan.
- Monthly Mortgage Insurance Premium (MIP or MI): In addition to the UFMI, an FHA loan requires monthly MI. Your lender will add this amount to your mortgage payment and pay it to FHA on your behalf. The only way to avoid the monthly MI is with a 20% or more down payment.
- Escrow/Impound Accounts: FHA requires borrowers to set up escrow accounts (often referred to as impound accounts) for their property taxes, homeowner insurance, and mortgage insurance. A lender collects this money monthly with your mortgage payment and deposits it into a separate account. When property taxes and homeowner insurance premiums are due, your lender will pay them on your behalf.
- The home MUST be your primary residence. FHA does not back home loans for 2nd homes or investment property purchases. However, FHA will allow multi-unit properties, up to four units, if you live in one of the units.
Qualifying For An Fha Loan
To qualify for an FHA loan, you will need to document the following:
- A two-year work history
- Two-years of income
- Cash assets on-hand
- Credit history (Your loan originator will access this report)
Alternatives To The Fha Home Loan Program
Undoubtedly, FHA is more widely recognized by the average person. However, it’s not the only low-down-payment program available to California homebuyers. If you have a credit score of 620 or higher, you may be eligible for a first-time homebuyer loan program with as little as 3% down.