FHA LOANS
Understanding FHA mortgage rates and what you need to apply
First-time homebuyers have a lot of options. They all come with questions. What’s the best interest rate category, fixed or variable? Does the current interest rate environment make sense to apply for a specific mortgage product? If so, what’s the right loan amount?
The same goes for loan products; there’s plenty to choose from, one of which is an FHA mortgage. Offered by most lenders, FHA loans are affordable, convenient, readily accessible and include flexible payment requirements.
Here are a few more of the basics that can help you decide if an FHA mortgage loan is appropriate:
What is an FHA mortgage?
Backed by the Federal Housing Administration, FHA mortgages are a commonly selected home loan option among first-time homebuyers. They offer a tremendous amount of flexibility, which comes in handy when you’re just starting out. The down payment for FHA loans can be as low as 3.5% and you don’t need a sterling credit score to be approved, as is often the case for conventional loans. Conventional loans also frequently require a larger down payment.
Another distinguishing characteristic of FHA mortgages is interest rate structure. FHA loans typically come as only 30-year fixed or 15-year fixed. Whatever the rate of interest is upon approval will remain the same for the life of the loan, which provides greater predictability.
What else makes it different?
Most home loans require private mortgage insurance (the rare exception being VA loans), assuming the down payment is less than 20% of the home’s list price. What also sets FHA loans apart from other mortgage products is initial payment is due upon mortgage approval, the percentage of which varies. The remainder of the balance can be paid out in installments over the life of the loan, depending on whether the loan is for 15 or 30 years. The approved loan amount and the loan-to-value ratio also affect the annual amount spent on mortgage insurance premiums. What you spend is typically more affordable compared to insurance premiums for conventional mortgages.
How are FHA rates determined by lenders?
Just as you take many factors into account when deciding which house is the right one for you, the same standard applies to how lenders decide on FHA rates. These include market forces, your credit history and your credit score. The higher your FICO® score is, the more likely it is you’ll spend less in terms of interest. Many elements are considered in this process; the more forthcoming and transparent you are about your financial history, the better.
What are the requirements to secure an FHA loan?
Mortgage lenders tend to vary slightly when it comes to what they require to be eligible for FHA loans, in terms of documentation and eligibility. Here are a few of them:
- Employment history and proof of ongoing income stream (pay stubs, bank statements).
- Two years’ worth of tax returns and accompanying documents (the most recent).
- Haven’t experienced bankruptcy in the last 12 to 24 months.
- House must be single-family, multifamily (two to four unit) or HUD-approved condominium.
- Property must be built on permanent foundation no earlier than June 15, 1976.
What should you consider before applying for an FHA loan?
- People who are unfamiliar with home buying may think that these mortgage products are offered by the FHA itself. They’re actually provided by private lenders that are backed, or approved, by the FHA. Nationwide Mortgage Bankers is one such lender.
- There’s a ceiling as to how much you’re eligible to borrow with a loan insured by the FHA, which has changed slightly from 2019. That amount depends on where you’re buying in terms of geography and the style of house, such as single-family versus multifamily or condo.
- How much you can borrow to purchase a house varies, as there are federally established limits depending on where you live and whether the house is one or multiunit. Check out the Department of Housing and Urban Development website to see what mortgage limits apply to your state and county.