3 Benefits FHA Loans Offer First Time Home Buyers

First time home buyers should take advantage of incentives provided through the Federal Housing Agency to reduce the cost of their loan. The FHA encourages first time buyers through lower interest rates, grant programs and classes to assist in understanding the cost of owning a home.

1 - Low Rates and Financing Costs

Many first time buyers will have lower credit scores, even if they have never defaulted on a loan, simply because they have not held large loans in the past. These low credit scores can force them into an adjustable rate or high risk mortgage. The main reason most first time home buyers seek a guaranty from the FHA is to capitalize on a lower interest rate and lower costs of financing.

When the FHA guarantees your mortgage, it promises to buy the mortgage from a private lender if you default. Giving your private lender this assurance means you will present less risk as a borrower despite your lack of experience in paying off a mortgage. Low risk loans are less expensive because of lower interest rates. Aside from lower interest rates, you will also find that your rate is always fixed if you use an FHA guaranty. Fixed rate mortgages are preferable because they will not jump to a higher monthly payment down the line. 

2 - First Time Home Buyer Grants

Grants differ from loans because they never have to be repaid. If you qualify for and receive a first time home buyer grant, then you may receive a portion of your mortgage without any obligation to repay the funds. Most grants are very small, representing only 3-5% of the total cost of the mortgage. However, this money can be allocated toward closing costs and origination fees.

Your mortgage lender will often charge you for loan origination, which is the expense they incur to write your loan contract. These fees plus closing costs can run up to 2% of the value of your home and are expected to be paid at the closing of your loan. Receiving these funds through a grant will greatly decrease the amount of cash you need to have up front in order to purchase a home.

3 - Education and Classes

There is more to affording a home than simply getting approved for a mortgage. Managing your housing expenses and choosing wise investments to your property are key in assuring you do not enter foreclosure some time down the line. In order to help you make better decisions about home ownership, the FHA offers classes for first time home buyers. In fact, to qualify for a grant you will be required to attend one of these classes and learn about financing your purchase.

In the class, you will learn about items such as responsible improvements, home assessments, taxes and home owner’s fees and even home equity loans. You will begin to understand the appropriate amount of debt to carry in your financial situation. You will also gain key information about avoiding default when you have a financial emergency, such as a job loss or illness. The FHA offers these classes free of charge to first time home buyers.