The FHA loan program is a good deal for many who do not have the money they need for a traditional loan, but it might not be for you. Take a look at some of the key details about this type of home loan.
FHA Loans Are Easier To Qualify For
It is more than just the low down payment that makes an FHA loan so appealing. They are also much less stringent when it comes to credit requirements.
The FHA program allows credit scores of as low as 500 and debt to income ratios of up to 50 percent.
Do keep in mind though that this is just the minimum that the FHA requires and lenders may have slightly different requirements. It would be difficult, for example to get a lender to approve you with a 500 credit score, even if the FHA is good with it. Most lenders will require a score of at least 580.
Mortgage Insurance Is Required
Mortgage insurance is required on all FHA loans and it can be very expensive. Mortgage insurance can add more than 200 dollars to the cost of your monthly mortgage payment.
What’s worse, is the fact that you will probably be paying this mortgage insurance for the life of your loan, unless you refinance. I say probably, because if you put more than 10 percent down, mortgage insurance will eventually drop. It will not drop for 11 years though and chances are good that you would have 20 percent equity in your home way before then.
Just know going in that mortgage insurance will be expensive and that you will likely have to refinance your loan to get out of it.
Your Down Payment Can Be Just 3.5 Percent
With a down payment as low as 3.5 percent, an FHA loan is a very attractive loan for those who find it hard to save a large down payment. On a 200,000 dollar home, your down payment would be just 7000 dollars.
Even better is that fact that the money can come from outside sources. You can get your down payment from a gift from a family member or even a grant from a home program.
Keep in mind that there are some slight benefits to putting more than the minimum down. If you up your down payment to 5 percent, you get a small decrease in your mortgage insurance costs. Should you put 10 percent down, mortgage insurance would automatically drop after 10 years. With a lesser down payment, mortgage insurance is yours to pay for the life of the loan.
A Reverse Mortgage Is An Option
If you are not familiar with a reverse mortgage, it is a program that allows older individuals to tap into the equity in their home.
To qualify, you mist be over 62 years old and either own your house outright or have a very low balance on the loan.
A reverse mortgage is not a solution for everyone, but it could allow someone to stay in their home during retirement instead of having to sell it.
You Can Get Free Help
If you get into trouble and get behind on your loan, you can get free financial help from the HUD. All that you need to do is reach out to your lender to talk about your options. Then, you can contact a HUD financial counselor to get free advise.
Having a trained financial counselor at the ready and free, can be a huge asset if you run into financial trouble.
You Pay Mortgage Insurance 2 Ways
You probably know that you will pay mortgage insurance with an FHA loan, but you might not know that you pay it twice. You will pay an up front fee and an annual one, paid monthly.
As of the writing of this article, the up front charge was 1.75 percent of the cost of your loan. So, with a 200,000 dollar loan, your fee would be 3500 dollars. This fee can be financed as part of your loan.
In addition to the up front fee, there is an annual premium. This is based on the value of the loan and the amount you put down. On a 30 year mortgage, is you put less than 5 percent down, you pay .85 percent. If you put 5 percent or more down, you pay .8 percent.
On the same 200,000 dollar loan, with less than 5 percent down, your annual premium would be 1700 dollars. That is about 140 dollars a month.
All FHA Lenders Are Different
The FHA program guarantees the loan but it does not set rates. Every lender sets their own rates and has their own particular loan qualifiers.
Because every lender is different, you should shop your loan around. Do not make the mistake of thinking that all lenders will offer the same term just because they participate in the FHA program.
There Are Loan Limits
There are limits to how much you can borrow. These limits are based on where you live and can be as little as $330,000 and as much as $765,000.
Don’t panic, the loan limits are generally enough money to get a mid level home in your county. If you are looking for a McMansion though, it is just not going to happen with an FHA. An FHA loan is not designed to help the super rich.