FHA Loans

FHA loans are the most popular loans for first time homebuyers, and they offer relatively easy qualification requirements. If you don’t have much of a down payment saved, FHA loans only require a down payment of 3½% of the price of the home, and that money can come from a variety of sources. Thus, for a home costing $200,000 you would need a down payment of $7,000 and your loan amount would be $193,000.

FHA doesn’t make loans. FHA or the Federal Housing Administration insures loans made by an FHA approved lender.  It a good idea to contact several lenders or mortgage brokers that originate FHA loans – and since lenders set their own rates and terms, shopping for the best rates and terms is advisable. Your real estate broker can be of assistance in this area.

FHA loans require MIP or a mortgage insurance premium which varies depending on the terms of the loan.  There is always an upfront fee of 1% of the loan which is normally paid to the FHA by the lender and added to the buyer’s loan amount. Then there is a monthly mortgage insurance premium that varies depending on the terms of the loan, but typically is 1.15% when the loan is for 30 years and down payment is less than 5%. So, an FHA loan is a little more expensive, but with today’s low rates, with FHA loans rates hovering around 3.75%, even with the extra 1.15% MIP you’re still at a relatively low 4.9%.

One of the great things about FHA loans are the easy credit qualification requirements, but lenders do look at your payment history on other debts. You can have credit scores below 600 and still get an FHA loan but you'll have to provide at least 3 sources of credit – but even utilities and cell phones meet the requirements. If little or no credit exists, the FHA will let a parent or any other blood relative co-sign for the loan even if they don’t live in the home – the is termed a Non-Owner-Occupied Co-Borrower. When you make your loan application, the lender may ask for a credit report fee of about $35 to $40 – and when you have made an offer on a property, the lender will also ask for an FHA appraisal fee – typically around $400.

Lenders also determine what type of home a buyer can afford based on their monthly income and their expenses. So if you know your total mortgage payment, including principal, interest, taxes, hazard insurance, homeowner association fees (if a PUD or a Condominium), and monthly mortgage insurance (if any). Divide that amount by the gross monthly income – they would like that to be less than 30% (your debt to income ratio).

Other FHA requirements are that a Banruptcy should be more than two years old and Foreclosure at least three years old, with no credit problems afterward. FHA lenders also like a stable job history, preferably with your current employer or in the same line of work and also with a steady or increasing income.  Students, may, however, use time in higher education like time on the job.

Here is a checklist of information that you should gather when making application for an FHA loan:

• Social Security number
• Addresses to your places of residence (past two years)
• Employment information including names and addresses of employers for the last two years
• Gross monthly income with two recent paystubs and two years W-2 forms
• Most recent bank statements for checking and savings accounts
• Information on current debts, including account numbers and balances.
• Information on any property that you own
• Estimated value of your personal property
• If you are self-employed - tax returns for the past two years along with a business income statement and business balance sheet

Conventional Loans

If you have good credit and a down payment of at least 5%, I would advise looking into a conventional loan.  For example, conventional rates are now around 4.125% compared to FHA of say 3.875% - but there is no 1% upfront fee like FHA loans, and the monthly PMI or Private Mortgage Insurance is only 0.66% compared to 1.15% for FHA. Therefore, your total rate for a conventional loan would be only 4.79% (4.125%+.66%= 4.79%) compared to FHA of 5.03% (3.875%+1.15%= 5.03%). 

The other benefit to a conventional loan is that you can do away with the .66% monthly mortgage insurance after only two years, if you have either paid down your mortgage balance to 80% or less of your original mortgage, or get an appraisal or a tax notice showing a higher value for your home that would have your mortgage balance at less than 80% of the new value.  FHA loans require a minimum of five years before you can eliminate your mortgage insurance. 

I will get more into the various conventional loans in a later blog, but suffice it to say, by getting a shorter term loan, for example, 15 years instead of 30, you can get a lower initial interest rate – right now it’s about 3% on a 15 year 80% loan – and you will save thousands over the lifetime of the loan.