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Even if you don’t fit the ideal mold that lenders look for in mortgage applicants, you can still realize your dream of homeownership. FHA loans often offer more flexible terms, lower down payments and less-stringent credit requirements than conventional loans. But if you think you can qualify for a conventional mortgage, you’ll likely pay less in interest and fees than you would with an FHA loan.
An FHA loan is a government-backed mortgage that is insured by the Federal Housing Administration (FHA). The FHA insures loans for FHA-approved lenders to reduce their risk of loss in the event that a borrower defaults on the mortgage.
FHA loans generally have more flexible terms and lenient credit requirements than conventional mortgages. But interest rates and fees for FHA mortgages — such as mortgage insurance premiums — are generally higher.
There are several different types of FHA loans, including:
To qualify for an FHA mortgage, you will typically need to meet the following criteria:
Although lenders will review each application on a case-by-case basis, the FHA requires a minimum credit score of 500 for its mortgages. If you’re making the minimum down payment of 3.5%, you’ll typically need a minimum credit score of 580.
If you don’t have any credit history, you may still be able to qualify for a FHA loan. Instead of reviewing your credit history, the lender will check other records, such as utility or rental payments.
Costs of taking out an FHA loan include:
A mortgage insurance premium (MIP) protects lenders in the event that you default on the loan, and it’s required for borrowers taking out an FHA loan. There are two main types of MIP:
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My husband and I took out an FHA loan in May 2015 in San Diego County. Because we put only 5% down, we pay almost $264 a month in private mortgage insurance — which feels like a fee down the drain.
At one point, I called Freedom Mortgage to ask whether we could get PMI removed if I paid the cash to get up to 20% equity. “After five years,” they answered. I did not realize this: In California at least, the FHA premium stays on up to five years and 20% equity.
I did the math on refinancing to a conventional loan and coughing up the remaining 15% to reach a 20% down payment. Because I was two years into my loan already, I had three years left of PMI to pay:
| Months remaining | Monthly Payment | Total cost |
|---|---|---|
| 36 | $264 | $9,504 |
If I refinanced to a conventional mortgage, I’d have to pay closing costs of about $2,500, plus I might qualify for a higher interest rate, because it’s a different type of loan. If my new loan was even a half percent higher than my current loan, I might end up paying $40,000 in extra interest over the life of the loan. It sounds like a bad tradeoff to save $9,500 in insurance.
We opted to keep the loan the way it is. And when the five years are up, we’ll make sure the PMI is removed.
An FHA loan can help low to moderate-income borrowers buy a house and save on rental costs, but it can come with higher fees than other mortgage types. If you’re still figuring out whether this is the right type of loan for you, compare other mortgage options to learn more.
Is it time to refinance your FHA to a conventional loan?
Read more…
Typically, if 3 years have passed and you’re working to get your finances in order, you may still qualify for an FHA mortgage.
The loan limits for FHA mortgages vary by state and county. Contact your lender for more information.
An FHA loan can be used for any property that is the borrower’s prime residence. An FHA mortgage cannot be used for rental or investment properties.
Veterans are required to submit the DD Form 214 along with their FHA application paperwork.
To qualify for Energy Efficient Mortgage, the equipment or materials installed to save energy must be cost efficient. The cost of improvements should be less than the total value of energy savings over the life of the loan. You also need to be eligible for the maximum FHA-insured financing available.
Same-day business loans can get you funds the same business day as you apply, rather than making you wait 24 hours or more.
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