Will you be buying your first home in California in 2017? Do you want to minimize the size of your down payment? If so, you might consider using the FHA loan program.
The Federal Housing Administration (FHA) mortgage insurance program has been a popular financing option among home buyers for decades. It’s particularly popular among California first-time home buyers with limited funds saved up for a down payment, for reasons explained below.
But is it the right mortgage option for you? Here are five important points you should know about using an FHA loan to buy your first home in California.
FHA Loans for California First-Time Buyers: 5 Key Points
The FHA loan program has been serving borrowers since the 1930s. It was created in response to the Great Depression. Today, this program serves the same primary purpose that it did when it was first created. It supports homeownership by making home loans more affordable for a larger group of Americans.
Here are five things you should know about using an FHA loan:
1. You’ll need a down payment of 3.5%.
If you decide to use an FHA-insured home loan to buy your first house in California, you’ll need to put down at least 3.5%. That’s the minimum required down payment for this program. Specifically, you’ll need 3.5% of the purchase price or the appraised value, whichever is less.
Here’s what a 3.5% down payment looks like at several price points:
- On a $200,000 home = $7,000
- On a $300,000 home = $10,500
- On a $400,000 home = $14,000
- On a $500,000 home = $17,500
The good news is that these funds don’t necessarily have to come out of your own pocket, as explained below.
2. Your down payment funds can be gifted from someone else.
One of the benefits of using an FHA loan to buy a first home in California is that the down payment funds (mentioned above) can be provided by a third party. This is refereed to as a down payment gift. The Federal Housing Administration allows borrowers to receive gift money from family members, employers, charitable organizations, and other sources.
Other types of loans allow for down payment gifts as well. This can be incredibly helpful for first-time home buyers in California, many of whom lack the funds for the down payment and closing costs.
3. HUD requires a credit score of 580 or higher for the low down payment.
The FHA loan program is manged by the Department of Housing and Urban Development (HUD). According to official HUD guidelines, borrowers using an FHA loan need a credit score of 580 or higher to qualify for the 3.5% down payment mentioned above.
Credit reports and scores offer some insight into how a person has borrowed and repaid money in the past. That’s why they’re used during the mortgage application, underwriting and approval process. If you want to use an FHA loan to buy your first home in California — and you want to take advantage of the 3.5% down payment option — you’ll probably need a credit score of 580 or higher.
4. In California, FHA loan limits range from $275,665 to $636,150.
There are limits to the amount of money you can borrow when using an FHA-insured mortgage loan. These “loan limits,” as they’re known, are based on median home prices and vary from one county to the next.
In California, these limits range from $275,665 in more affordable areas, up to $636,150 in more expensive housing markets like Orange County and San Francisco.
5. It might be a good option for buying your first home in California.
FHA loans are not limited to first-time home buyers in California. Anyone who meets the minimum requirements for the program can obtain an FHA-insured mortgage, even if they’ve owned a home in the past. But this program is particularly well suited for first-time buyers, and for a number of reasons.
We’ve touched on some of these reasons above. It allows you to make a relatively low down payment when buying your first home in California, and the funds can be gifted from someone else. That’s a big benefit for first-time buyers.
Additionally, FHA is one of the easiest mortgage programs to qualify for. The federal government insures these loans, giving lenders an added layer of protection. As a result, the eligibility criteria for borrowers tend to be more lenient (when compared to a conventional mortgage).