Thousands of people every year obtain a FHA Mortgage. FHA stands for Federal Housing Authority and was created by the National Housing Act of 1934. FHA mortgages were designed to help low to middle income Americans buy homes.
After World War II they were used to help American soldiers buy a home after the war. Along with purchasing a home a FHA mortgage loan can be used to refinance a current mortgage. Currently the FHA home loan program focuses on homeowners who have little equity and less than perfect credit and home buyers who have a small down payment and less than perfect credit.
Benefits of a FHA mortgage
The FHA mortgage loan program is a great way to obtain a low mortgage rate with a limited amount of fees. The loan application process can be quick for some and those with a current FHA mortgage (looking to refinance into a new FHA mortgage) don’t have to do an appraisal!
The main benefits of a low rate FHA mortgage are:
- If you have below a 680 credit score a FHA mortgage is probably a good fit for you. Late payments etc. on your credit history will really hurt your chances with obtaining a low rate on a conventional loan but have limited impact on a FHA home loan.
- If you don’t have a lot of money to put down for a down payment or you have little equity the FHA home loan program could be a great fit for you. Home buyers and homeowners only need 3.5% (down payment or equity) to be able to obtain a new FHA mortgage.
- If you have a FHA mortgage currently and you want to refinance your current mortgage then the FHA Streamline home loan program is for you. Super fast, super easy and a low rate. Many homeowners finish the application process in less than three weeks!
The main qualification for the FHA home loan program is the amount of money you are borrowing. For 2020 that limit is $331,760 which is nearly a $17,000 increase from 2019. Over sixty “high cost” counties have a higher ceiling of $726,525.
Another important qualification is the maximum debt to income ratio (the amount of debt you have compared to your monthly income). Right now that “maximum” is 43% (so if you make $10,000 per month your maximum monthly debt payments, for all debts including your home, is $4,300). The good news is that there are exceptions and some borrowers do get approved with debt to income ratios above 43%.
When it comes to your credit score you probably want a score above 600 to obtain the best mortgage rates and terms with your lender. Some say a 620 is needed while other lenders will say 580 or higher.
If you are below a 580-credit score there still may be some options but obtaining a new FHA home loan will be more difficult.
One of the most important things to remember when obtaining a new FHA mortgage is that these loans come with “Mortgage Insurance”. What is “Mortgage Insurance”? Well it’s not your homeowners insurance which covers your home in case there is a fire. Mortgage Insurance (aka MI) is an insurance policy the lender obtains from FHA that covers the lender in case your default on your mortgage.
The homeowner pays the MI fee (up front and monthly). The upfront Mortgage Insurance Premium (MIP) is either paid at closing (added to the loan amount) or the interest rate is increase to cover the amount. For the most current amount be sure to ask your Loan Officer. In addition to the upfront Mortgage Insurance there is also a monthly amount that you need to pay and it’s added to your monthly mortgage payment.