FHA loans are a wonderful way to finance the purchase of a home. Millions of homebuyers use them to finance a home purchase or home improvements each year. Despite the widespread popularity of FHA loans, they are a mystery to many potential homebuyers. There are plenty of FHA loans facts that are often overlooked when homebuyers search for a home financing option.
As a potential homebuyer, you need to know about the many financing options that are available to you. Especially for homebuyers with a less than perfect credit history, FHA loans offer features that many other mortgage loan programs do not. Here are some important FHA loans facts that could help you become the owner of the home of your dreams.
FHA Loan Facts
Qualifying for an FHA Home Loan Is Easier Than Qualifying for Other Mortgage Loans
FHA loans are available to borrowers who have lower credit scores or less cash for a down payment than may be needed for other home loan programs. Lenders of FHA loans are able to lend to these higher risk borrowers because FHA loans are insured by the Federal Housing Administration.
The minimum requirements set by the FHA that a borrower must meet to qualify for an FHA loan are:
- A credit score of 500 or higher.
- A debt-to-income ratio of 50% or less.
- A 3.5% minimum down payment.
- The home will be the borrower’s primary residence.
Although the FHA sets minimum requirements, borrowers will find that some lenders may have stricter standards. One FHA lender might require a minimum credit score for an FHA loan at 580 rather than 500, while another FHA lender may loan to borrowers with a credit score of 500 but require a higher down payment. Thus, it is important to shop around for the best FHA loan terms.
Mortgage Insurance Is Required Regardless of the Amount of Down Payment or Equity
For all FHA loans, the borrower must have FHA mortgage insurance. This is different from most private mortgage loan programs, where lenders require mortgage insurance only when borrowers put down less than 20 percent of the purchase price. Under the FHA loan program, mortgage insurance cannot be canceled on the grounds that you have gained a set amount of equity in your home.
That said, the FHA mortgage insurance need not be necessary for the life of the loan. With a down payment of 10 percent or more, you will have to pay FHA mortgage insurance for 11 years. However, if you provide a down payment of less than 10 percent of the purchase price, you will have to pay FHA mortgage insurance for the life of the loan.
The mortgage insurance premium should total 1.75 percent of your loan amount. You can pay it at closing or you can finance it as a part of your FHA loan.
If you finance the cost of your mortgage insurance premium, you will pay an additional 0.45 to 1.05 percent in your monthly house payment. That amount is adjusted annually and is based on the remaining principal loan balance. Your mortgage lender can review those important details with you at the appropriate time.
Your Credit Score Will Affect the Interest Rate You Pay
Your credit score is one of the most important factors that the lender will consider in determining how much interest you will pay for the loan. That is true whether you use an FHA loan or any other loan program.
FHA Financing Is Available to Buy Mobile Homes, Manufactured Homes, or Fixer-Uppers
FHA loans can be used to buy a home other than a traditional single family home. FHA financing is available to buy a mobile or manufactured home. Perhaps you are looking for something inexpensive that you can fix up. Such fixer uppers are typically covered by FHA loans and can help you keep a little extra to pay for the renovations. There is also special financing for buyers looking for ways to finance energy-related home improvement projects.
Some Closing Costs Can Be Financed in the FHA Loan
Closing costs must be paid regardless of the type of loan you use. Like other loan programs, FHA closing costs include the mortgage insurance, lender and third-party fees such as appraisers and home inspections, and taxes and prepaid items that are due when signing your mortgage paperwork. On average, you should expect mortgage closing costs to run from 2% to 5% of the loan cost.
Under FHA loans, the borrower can get assistance with some closing costs. In those cases, however, the lender will charge the borrower a higher interest rate.
Some borrowers can reduce these costs by getting help from a family member. Some costs but not all, can be negotiated and borne by the seller as part of the sales contract negotiation. Your real estate agent and your lender will review these costs with you before you commit to purchasing a property.
Apply for an FHA Loan with Fairfax Mortgage
FHA loans provide many first time home buyers a way to finance the home. The benefits and flexibility of the FHA loan program also makes it appealing for repeat home buyers and buyers with problems with their credit history. Contact the mortgage experts at Fairfax Mortgage Investments to discover more FHA loans facts and find out whether an FHA loan is right for your home financing needs.
