With close proximity to the bustling metropolis of New York City and all of the quintessential charm of New England, Connecticut truly offers the best of both worlds. Add to that the state’s rich, revolutionary history, thriving economy, beautiful cities, top-notch universities and high quality of life, and it’s easy to see why so many first time homebuyers want to call the “Constitution State” home. If you count yourself among that number but worry that you won’t qualify for a conventional loan, applying for an FHA loan in CT could be the answer.
The FHA loan program was developed by the U.S. Federal Housing Administration to help veterans, first time homebuyers and lower income Americans borrow money to purchase property. FHA mortgage loans may only be provided by FHA-approved lenders and have different eligibility requirements than a conventional loan that make them more accessible.
However, for all of its benefits, there are still drawbacks to the FHA loan program, so it’s important to have all of the information before you apply for an FHA loan in CT.
Pro: Lower down payments … One of the biggest selling points of the FHA loan program is that borrowers are only required to pay 3.5% down. As an added bonus, if you’re approved for an FHA loan, you can use monetary gifts from family members, domestic partners and friends toward your down payment; with enough funding, your down payment could come at no cost to you.
Con: … that are contingent on credit score/history. Although it’s true that the FHA loan program is more forgiving to borrowers with low credit scores or non-traditional credit history, a low credit score will still affect your ability to qualify for the low down payment advantage. Only borrowers with a credit score of 580 or higher are eligible for a lower down payment; if your credit score is anywhere between 500 and 579, you could pay as much as 10% down.
Pro: Borrow money for repairs. Is your heart set on a home in need of a little TLC? You can apply for an FHA 203(k) loan, which is designed to help homeowners secure the necessary funds to complete major home improvements. Note that a 203(k) loan is not based on the current value of the property, but on its projected value after repair.
Con: Minimum Property Standards. Although a 203(k) loan can certainly expand the range of property options available to you, it can’t open all doors. One of the most important stages of the FHA loan application process is to work with a Department of Housing and Urban Development-approved appraiser to review the conditions of the home. Generally, these appraisers ensure that the home meets Minimum Property Standards (that the home be safe, livable and up to code), though an overly zealous appraiser could deny approval based on a minor infraction, causing you to lose the property.
Con: Stricter loan limits. Lending limits in CT vary from county to county based on factors such as median cost of housing per county and type of housing. Conventional loan limits are generally higher than FHA loan limits. For example, the conventional loan limit for a single-family home in Hartford County is $453,100, while the FHA loan limit for the same home is $353,050.
Pro: FHA loans are assumable. If you’re purchasing a home from someone who previously financed their home with an FHA-insured loan, you have the option to assume their mortgage rather than obtain a new mortgage. If you choose to do so, you could secure a lower mortgage rate.
This is one of the tactics many sellers use — as well as contributing toward closing costs, up to 6% — to attract potential buyers. Just be aware that in order to assume a seller’s mortgage, you must first receive lender approval, the same as if the loan were newly originated.
Pro: No prepayment penalties or similar fees. With a conventional loan, the lender reserves the right to charge a prepayment penalty if you pay off your loan too quickly. This gives the lender the opportunity to recoup some of the cost of lost interest over time. Until recently, FHA-approved lenders were allowed to write prepayment penalties into their mortgage contracts, but the rules were changed in the interest of protecting borrowers from unnecessary fees and hidden expenses.
Con: You’ll pay more for mortgage insurance. FHA loans are considered higher risk than other loans because they are often granted to borrowers who have lower credit scores and higher debt-to-income ratios, and therefore could be more likely to default on their loans. Unfortunately, this means that if you’re approved for an FHA loan in CT, you’ll have to pay higher mortgage insurance premiums.
There are two premiums all FHA borrowers must pay: an upfront premium and an annual premium. You pay the upfront premium — 1.75% of the loan amount — when you take out the mortgage; you have the option to either pay this premium at closing or roll it into your loan amount. The annual premium is added to your monthly mortgage payments and can range anywhere from 0.45% to 1.05% depending on the size and terms of your loan. These premiums are perhaps the most significant drawback to the FHA loan.
Buying your first home is one of the biggest financial investments you’ll make in your life. That’s why it’s important to approach the decision with all of the facts and with the right mortgage broker behind you to simplify the process. Fortunately, the experienced brokers at Blue Water Mortgage Corporation are here to help.
With over 150 years of combined experience, our brokers have the expertise necessary to not only help you determine which type of loan best fits your specific situation, but to connect you to the right lender and secure the best loan terms possible. We strive to develop relationships build on mutual trust and respect with each and every client and we’ve helped countless first time buyers finance the home of their dreams. If you’d like to learn more about Blue Water and the services we provide, talk to one of our mortgage experts today.