FHA Home Loan: What You Need to Know
Buying a home is a huge financial commitment, and finding the right mortgage can be a confusing process — especially for first-time homebuyers. Comparison shopping is the key to getting the best deal, and your also hear about FHA Home Loans. Lets talk about basic FHA loan questions.
Here are 7 important questions to consider when deciding which mortgage is right for you:
What is an FHA loan?
An FHA loan is a mortgage insured by the Federal Housing Administration. Borrowers with FHA loans pay for mortgage insurance, which protects the lender from a loss if the borrower defaults on the loan.
What is a FHA Mortgage Insurance?
Mortgage insurance lowers the risk to the lender of making a loan to you, so you can qualify for a loan that you might not otherwise be able to get. Typically, borrowers making a down payment of less than 20 percent of the purchase price of the home will need to pay for mortgage insurance. Mortgage insurance lowers the risk to the lender of making a loan to you, so you can qualify for a loan that you might not otherwise be able to get. But, it increases the cost of your loan. If you are required to pay mortgage insurance, it will be included in your total monthly payment that you make to your lender, your costs at closing, or both.
Annual premiums for FHA loans
- 15-year loan, down payment (or equity) of less than 10%: 0.7%
- 15-year loan, down payment (or equity of 10% or more): 0.45%
- 30-year loan, down payment (or equity) of less than 5%: 1.35%
- 30-year loan, down payment (or equity) of 5% or more: 1.3%
Why people get FHA loans?
Because of that insurance (Mortgage insurance), lenders can and do offer FHA loans at attractive interest rates and with less stringent and more flexible qualification requirements. The FHA is an agency within the U.S. Department of Housing and Urban Development.
» MORE Compare FHA mortgage rates
FHA loan minimum credit score requirements
Minimum credit scores for FHA loans depend on the type of loan the borrower needs. To get a mortgage with a down payment as low as 3.5%, the borrower needs a credit score of 580 or higher. Those with credit scores between 500 and 579 must make down payments of at least 10%. People with credit scores under 500 generally are ineligible for FHA loans. The FHA will make allowances under certain circumstances for applicants who have what it calls “nontraditional credit history or insufficient credit” if they meet requirements. Ask your FHA lender or an FHA loan specialist if you qualify.
Minimum downpayment on FHA home loan
For most borrowers, the FHA requires a down payment of just 3.5% of the purchase price of the home. In late 2014, Fannie Mae and Freddie Mac reduced minimum down payments to 3% from 10%, but such loans have limited availability.
» MORE Use FHA Mortgage Calculator
Cost of getting an FHA loan
FHA borrowers are charged an annual mortgage insurance premium of up to 1.35 percent of the average outstanding balances of their loans. The fee is added to the borrower’s monthly mortgage payment. The FHA also charges a 1.75 percent upfront fee when the borrower gets the loan.
For example, a borrower getting a $200,000 loan, after making a 3.5 percent down payment, pays $225 per month in FHA mortgage insurance, plus an upfront fee of $3,500. Say you keep that mortgage for 10 years before you sell or refinance that adds up to about $30,000 in mortgage insurance fees.
That’s substantially more than what a borrower would pay for PMI (private mortgage insurance) on a conventional loan, which doesn’t have an upfront fee. The mortgage insurance premium on a conventional mortgage can be less than half of FHA’s insurance, depending on the borrower’s credit, according to estimates from mortgage insurance company United Guaranty.
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How to choose FHA lender?
You might think that you don’t need to shop around for an FHA home loan because it’s a government program. According to a statement released by the Department of Housing and Urban Development, homeowners that compare at least three quotes when shopping for a lender save an average of $3,000 over the life of the loan.
Costs, services and underwriting standards will vary among lenders or mortgage brokers, so it’s important for borrowers to shop around.
» MORE Compare FHA mortgage lenders