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Are FHA Loans a Good Choice for First-Time Buyers in California?

First-time home buyers in California have many options when it comes to choosing a mortgage loan. Fixed-rate vs. adjustable. Jumbo vs. conforming. Conventional vs. government-insured. These are just a few of the choices you’ll encounter when shopping for a mortgage loan.

Today, we’ll zero in on a common question among California first-time home buyers: Is an FHA loan the best mortgage option for a first-time buyer?

The short answer: FHA loans can be a great option for some borrowers, especially those who have had credit issues in the past. But they also have a downside, in the form of long-term mortgage insurance. We’ll explore all of these pros and cons below!

FHA Loan: A Good Choice for California First-Time Buyers?

The FHA program is a popular financing tool for first-time home buyers in California and nationwide. This program is managed by the Federal Housing Administration, which is part of the Department of Housing and Urban Development, or HUD.

What makes these loans unique is that the federal government (through HUD and FHA) insures the lender against losses that might result from a mortgage default.

As a result of this government backing, lenders are generally more flexible with their guidelines for FHA loans, compared to conventional mortgages that are not insured by the government.

Advantages: Flexible Criteria and Low Down Payment

FHA mortgages are not limited to first-time home buyers, but they are well-suited for such borrowers. First-time buyers often lack the funds needed to make a large down payment. So the FHA’s minimum down-payment requirement of 3.5% can be very appealing to these borrowers.

It is generally easier to qualify for an FHA mortgage than a conventional loan, in terms of credit scores and debt ratios. That’s because of the government backing mentioned earlier. But it’s the down payment factor that makes FHA loans popular with many first-time buyers in California.

If you have limited funds saved up for a down payment, and/or you’ve had credit-related issues in the past, you might want to consider the FHA loan program. It’s worth researching, at the very least.

Disadvantages: Mortgage Insurance for ‘Life’

Of course, there are some disadvantages to using this particular program. For one thing, you will have to pay a mortgage insurance premium on top of the loan itself. This is true for all borrowers who use an FHA loan to buy a house.

If you use a conventional mortgage with at least 20% down, you would not have to pay for any mortgage insurance. But for most first-time buyers, the benefits of a low down payment and easier qualification outweigh the mortgage insurance premium.

However, California first-time buyers who use conventional loans can also encounter mortgage insurance. It doesn’t just apply to the FHA program. If a borrower uses a conventional (non-government-backed) home loan that accounts for more than 80% of the property value, private mortgage insurance will probably be required.

In this situation, the home buyer must compare the cost of PMI for a conventional loan, versus the cost of mortgage insurance for an FHA loan.

First-time home buyers should explore all of their mortgage options before coming to a final decision. This means weighing the pros and cons of both FHA loans and conventional financing.

For a borrower with good credit and a higher down payment, the PMI option might be more affordable. In other cases, the FHA mortgage insurance might be the more affordable option. It can vary from one borrower to the next. That’s why it’s so important for first-time home buyers in California to research and compare all of their mortgage options.

Speaking of which…

Ready to Explore Your Mortgage Options?

For some first-time home buyers in California, the FHA loan program might be the best financing option. It offers a relatively low down payment and flexible qualification criteria.

For other first-time buyers (especially those who can afford a larger down payment), a conventional mortgage loan might be the better choice.

And then we have the VA loan program, which was created specifically for military members and veterans. California first-time buyers who qualify for this program can buy a house with no money down, in many cases.

Bridgepoint Funding serves borrowers across the Golden State and offers all of the financing options mentioned above. We can help you choose the best type of mortgage loan for your particular situation. Please contact our knowledgeable staff with your financing questions or to apply for a loan!

Mike Trejo

Mike Trejo is a Bay Area mortgage broker with 20+ years of knowledge and experience.

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