June 17, 2016 - 10:00 pm
The Federal Housing Administration is a government agency that sets the standards for building construction — but for homeowners or homebuyers it can be a lot more. FHA-approved loans can help borrowers overcome obstacles standing between them and homeownership, and give homeowners options to keep mortgage payments manageable.
While the FHA doesn’t actually lend to buyers (FHA loan is just another term for FHA-approved loan), it sets standards for mortgage lending and offers tools that current and potential homeowners can use to attain assets, save money on payments and move ahead financially.
For homeowners and those planning to buy a home, it’s important to know the rules and limits of FHA loans and consider them along with other home-financing options. You might even be surprised to find you will have more mortgage choices available to you than you thought. Here are five things you might not know about FHA mortgage rates.
1. Your down payment for an FHA loan can be minimal.
FHA loans are great for homebuyers with lower savings or who don’t want to deposit all their cash into the home.
The minimum down payment required by FHA loan rules is 3.5 percent, which means if you’re buying a $300,000 home, you only need $10,500 to put down (not including any fees or closing costs). For many conventional mortgages, you’d need to provide as much as 20 percent (or more) down, which for the same $300,000 home would be a whopping $60,000.
2. You can get an FHA loan with bad credit.
Insufficient credit or a less-than-ideal credit history doesn’t have to mean you can’t qualify for a mortgage. Even those with “bad” credit as low as 500 can get an FHA loan. If your credit score is between 500 and 579, you can still qualify for an FHA loan — you’ll just need to put at least 10 percent down instead of the 3.5 percent required for scores of 580 and up. Check with your lender to see if you meet all other requirements.
3. You can use your loan to help cover repairs.
FHA loans have an optional add-on loan product called a streamlined 203(k) rehab loan, which allows you to borrow up to $35,000 to pay for home repairs and improvements like replacing carpet or paint, remodeling, or correcting nonstructural home damages. Even better, the amount of the loan is based on the projected home value after the fixes are made, not the value of the home in its imperfect condition.
4. Mortgage insurance is mandatory on FHA loans.
Mortgage insurance protects lenders in the event that a buyer defaults on his mortgage. Because the buyer fronts a smaller portion of the home’s value, lenders are taking a bigger risk by financing FHA loans. This means you’ll have to pay for private mortgage insurance (PMI) including the upfront premium, which is at 1.75 percent, plus the annual premium that varies by loan amount and term length as follows:
• For a 15-year loan with a down payment or equity of less than 10 percent, the annual premium rate is 0.7 percent
■ For a 15-year loan with a down payment or equity of 10 or more percent, the annual premium rate is 0.45 percent.
■ For a 30-year loan with a down payment or equity of less than 5 percent, the annual premium rate is 0.85 percent.
■ For a 30-year loan with a down payment or equity of 5 percent or more, the annual premium rate is 0.8 percent.
But don’t worry — mortgage insurance is tax deductible through 2015, so that extra payment won’t actually take as much out of your pocket as you think.
5. It’s easier to refinance an FHA mortgage.
For homeowners who already have an FHA-financed home, refinancing can be a great way to put equity to work and save money on monthly payments.
For example, once you’ve reached an 80-to-20-percent ratio home value to loan amount, you might be able to refinance and reduce or even eliminate your mortgage insurance and save as much as several hundred dollars per month.
Typical refinancing will require an appraisal, paperwork, possible fees and sometimes even an additional down payment.
Buying a new home is exciting, especially for first-time homebuyers. As you shop for the right home — and the right loan — keep in mind the benefits and limitations associated with FHA-approved loans, and talk to your lender about available loan products.
Even with a small down payment, you could be a homeowner with a high-net worth sooner than you think.