An FHA mortgage is a loan insured by the Federal Housing Administration. The FHA, an agency of the U.S. Department of Housing and Urban Development (HUD), insures loans so that lenders will offer appealing rates to less qualified borrowers at a lower down payment. Typically, an FHA loan requires a down payment of just 3.5 percent and allows sellers and lenders to offer special incentives. In return, FHA-approved lenders may charge a higher interest rate, so borrowers should shop for the best rate among FHA-approved lenders (a good mortgage Broker can help). Your payment includes a premium amount to pay for the mortgage insurance the FHA provides.
Result of Premium Hikes
Many of the mortgage defaults during the housing collapse were FHA insured homes. In response, the FHA began raising premium rates and fees in 2010. Now at their highest to date, premium rates and fees were raised at least five times since then, resulting in borrowers paying roughly $100 more per month in out-of-pocket expenses for home ownership on a $150,000 home. Upfront premiums are higher too. According to Robert Freedman at the National Association of Realtors, the result is a reduction by 90 percent in mortgage originations among borrowers in the 620 to 680 credit score range among moderate-income households because they cannot afford the additional $1200 in annual payments.
Is an FHA Loan Still a Good Deal?
If you dream of home ownership but cannot make the 20 percent down payment required for a conventional loan, an FHA loan may still work for you. Just know that your payments will be higher than in the past. Qualifying is more stringent too, since lenders my baulk at credit scores lower than 620 even though the FHA only requires a score of 580 to meet its 3.5-percent down payment option. As a potential aid to borrowers, the upfront premium may be rolled into the loan, spreading that cost out over time.
Ways to Reduce Payments
The annual premium varies according to the down payment, or if you are refinancing, by the amount of equity you have in your home. If your down payment is at least five percent, you may qualify for a lower premium. Additionally, utilizing a graduated payment loan or adjustable rate loan may result in lower initial payments. The best way to reduce payments, however, is by making a larger down payment. The FHA allows portions of the down payment to come from family gifts as well as from personal savings, so if your family can help, you could get a lower rate.
Qualify for a Better Loan
More than anything else, borrowers should consider avoiding these mistakes when looking to qualify for an FHA loan. Do not make large purchases on credit before applying for your loan. Your debt-to-income ratio weighs heavily in your ability to qualify for a loan. Work on your credit score. The higher your credit score, the better your chances. Be careful and deliberate in how you use credit, make payments and pay down existing loans. Avoid overbuying on your home. Your first home does not have to be the only home you’ll own. Consider it a starting point on a lifelong journey to the right home at the right time. Start with the home you can manage without being what I call “house poor,” with so much of your monthly income going to house costs that you can’t manage or enjoy other aspects of your family and personal needs and wants.
We specialize in helping you find the right home for your situation. Contact us for a free consultation on home market conditions and available homes that would fit your needs. Let’s talk about whether an FHA mortgage insurance program is right for you.