With interest rates still close to historic lows and many sellers anxious to move their properties, this is a great opportunity for home buyers. For the first-time buyer, the government is adding an $8,000 tax incentive besides. Conventional lending, however, has become more difficult to qualify for and there are new limitations especially regarding condos. Some mortgage companies will not even lend without a 15% down payment or more on condos. This should not discourage buyers who cannot save enough to cover this amount.
Government-backed loans (FHA-Federal Housing Authority) allow buyers to put down as little as 3.5% and receive up to an additional 6% back from the seller in closing costs. You must intend to occupy the property as your primary residence.
Thus, a $200,000 home could be purchased as follows: Conventionally with $30,000 down or FHA with $7000 down. Assume the closing costs are about $4000. If the seller on the FHA provides only a 3% credit (which is common), your total cash outlay is $5000 on the FHA deal compared with $34,000 on the conventional loan.
But now you have a $193,000 mortgage vs a $170,000 mortgage. At the current rate of 5.5%, the difference, however, is only about $130 per month. ($965 for principle and interest on the conventional loan to $1095 for the FHA loan).
So, what’s the catch? The property to be purchased must be FHA approved. This does not mean the property has to be in a depressed area. Most single-family homes will qualify as long as all the systems are in good working order. Condos, however, have different requirements. At least 51% of the units must be owner occupied and the association may not have “first right of refusal” on potential buyers. This means exactly what is says. FHA interprets this as a possible means of discrimination. Unfortunately, many buildings in Chicago have this in their association even though they have seldom exercised the right. Be sure you have investigated this possibility before attempting to purchase using FHA financing.
Hmm. It’s convincing enough–there’s plenty of reasons to buy a home via FHA, but then again there’s also other factors to consider. But with the 10%/$8,000 tax credit at hand, it’s hard to say no.