Spotlight: Reasons why first time home buyers are seeking FHA loans in New Jersey
Ever since the mortgage meltdown in 2008 and 2009, home loans have been hard to come by. But in recent months, within the past year or so actually, lenders are once again loosening the purse strings and mortgages are a bit easier to procure. Unfortunately, there are still reasons why some people are not qualifying for home loans and other reasons why lenders are slow to underwrite those high dollar mortgages. Before looking at why first time home buyers are seeking government backed loans in New Jersey, a quick look at the mortgage industry as a whole might serve as a good foundation for understanding FHA loans NJ offers.
A Few Facts to Be Aware Of
While everyone knows that lenders don’t underwrite mortgage loans out of the goodness of their hearts, many don’t realize just how much a mortgage lender can actually lose if the borrower defaults on that loan. The common thought process goes something like “If I don’t pay the mortgage they’ll just get the home back, resell it and not lose anything.” There is something inherently wrong in that way of thinking on several levels. First of all, there is a lot of red tape involved in foreclosing on a home where the borrower defaulted and sometimes it takes months, even a year or more to take possession of that home.
Also, many homeowners damage the property to some extent which means that expensive renovations need to be made in order to bring it up to market value. That is more money that the lender is putting out. Then there are unpaid property taxes in many cases and what about the cost of real estate in that market area at the moment? If you bought a home in 2005 before the credit crunch, properties were, for the most part, valued much higher. It is just beginning to be a seller’s market where asking prices are somewhat in keeping with what they were a decade ago and so losing all that value (depreciation plus fair market prices) is a major financial loss to the lender.
Benefits of an FHA Loan for the Lender
Another aspect of an FHA loan is the fact that the government isn’t really lending you the money, contrary to popular belief. The Federal Housing Administration, FHA, is only guaranteeing the loan so that lenders will make funds available to borrowers who might otherwise not be able to qualify for a mortgage loan. Even with an FHA loan, if the borrower defaults on it, the government only guaranteed the loan, not the actual state of the property when it was handed off to the lender during foreclosure.
As mentioned above, there are times when the borrower did severe damage to the home and even some structural damage so that the home is not worth the amount having been loaned and a considerable amount of money will need to be thrown into it for repairs. Even with a government guaranteed loan, the lender can lose a great deal of money. However, the major benefit is that all money is not lost and many times the lender does get back what was loaned if there are no major problems with the property when it is foreclosed on.
Benefits to the Borrower with an FHA Loan
The main reason why a first time home buyer would seek an FHA loan is typically because they lack the credit history to qualify for another type of loan that isn’t backed by any agency. You will still need a sufficient credit score to qualify for an FHA mortgage but history becomes a bit less problematic. Also, interest rates tend to be much lower so monthly mortgage payments are less.
Other benefits to the buyer include a lower down payment if your credit score is acceptable. Anything lower than 579 will require at least a 10% down payment but higher than 579 may not need anything more than closing costs. There are a number of variables that determine how much a borrower would need at closing but typically it is a much lower amount than on other types of mortgage loans.
Because the loan is easier to qualify for and because interest rates are typically lower because the government requires low rates, an FHA loan is a great option for a first time home buyer who is unable to qualify in any other way. Not all lenders offer FHA loans so if this is the route you need to take, make sure to check on the availability of these guaranteed loans prior to talking to the lender.