Any home buyer can apply for FHA mortgage loans, as there is no limit on income to qualify. However, first-time home buyers and borrowers with low- to-moderate incomes are those who usually apply. Although FHA-approved lenders offer competitive interest rates and loan terms, borrowers don't always understand how the program actually works.
Here are some things you need to know about FHA mortgages from the start:
FHA insures loans. It doesn't make them.
Many people don't understand that the Federal Housing Administration (FHA) is not the lender making you the loan. You do not apply for a loan directly from FHA. Instead, the program works with other mortgage lenders who write the loans.
What FHA does is insure the loan, reducing the risk to the lender. This allows FHA to make loans to borrowers who pose greater risk. FHA loans help borrowers who might not otherwise qualify for a conventional mortgage loan because of a low credit score or not having a large down payment.
FHA-approved lenders are more flexible in their loan requirements.
Although the less stringent qualification requirements make it easier for some people to get a loan, not all FHA-approved lenders are created equal. The same as with conventional lenders, interest rates, services, underwriting standards, and loan costs vary. To get the best loan deal, you need to talk to more than one FHA lender before applying for a loan.
An FHA loan allows you to make a lower down payment.
The down payment a lender requires for an FHA mortgage loan is lower than for a traditional mortgage loan. FHA lenders offer mortgages for as little as 3.5 percent of the home's purchase price as a down payment. You can pay more if you are able.
To qualify for a low down payment, you must have a minimum credit score of 580. If you have a lower credit score that falls between 500 and 579, the lender still may qualify you for a loan, but you may have to pay at least 10 percent down.
Another perk is you don't have to use your own money to make the down payment. FHA allows you to use money you received as a gift from a family member. You also can apply for help from a local or state down payment assistance program.
Unless you currently have an FHA mortgage, you can't apply for an FHA Streamline loan.
If you want to refinance your home with an FHA Streamline mortgage, you must have an existing FHA loan. As long as you have kept your current loan payments up to date, you should qualify. The application process for a streamline loan doesn't require an appraisal, cutting the time it takes to get the loan approved.
A streamlined 203(k) is a way to borrow cash to make nonstructural repairs to your home. The amount you can borrow is based on how much the home will be worth after you make the repairs, not on its current appraised value. You must borrow a minimum loan amount of $5,000, although you can't borrow more than $35,000. A licensed contractor must make the repairs.
FHA guidelines require borrowers to pay mortgage insurance premiums.
Even though FHA insures the loan, you still must pay a type of mortgage insurance, which protects the lender from loss if you fail to make payments and default on the mortgage. Referred to as a mortgage insurance premium (MIP), you pay a lump sum -- 1.75 percent of the loan amount -- up front at the time you close on the loan. The lender may finance the cost as part of the loan amount, but likely will charge you a higher interest rate.
After you get the loan, you pay an annual mortgage insurance premium in monthly installments. The premium varies depending on the amount of money you borrow, how much of a down payment you made, the loan term (15-year loan or 30-year loan), and the initial loan-to-value ratio (LTV). Your home's loan-to-value ratio calculates how much of the property is being financed. This tells you how much equity you had in the home at the time you bought it -- something you need to know when figuring MIP payments.
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