If you’re thinking about buying a new home, an FHA loan might be your best option. Tailored to borrowers with lower credit scores and lower down payments, the FHA loan is often ideal for first-time homebuyers.
FHA loans are insured by the Federal Housing Administration (FHA) can make it easier for you to qualify to purchase or refinance a home. This loan option offers flexible qualification guidelines to help people who may not be eligible for a conventional mortgage.
How an FHA Loan Works
In many ways, an FHA loan is like any other mortgage refinance. You can get a fixed-rate or adjustable-rate mortgage. You can select a 30-year, 20-year or 15-year mortgage.
The essential differences are some of the requirements put in place by the FHA to make it easier for borrowers to qualify.
FHA loan requirements
To qualify for an FHA loan, you’ll need to meet the following requirements:
- 3.5% down payment for most credit scores
- Debt-to-income ratios will follow automated underwriting, however, it is typically 50% or less
- Document consistent income and employment history
- The home will be where you live, your primary residence
- You have not had a foreclosure in the last three years
The FHA loan is designed to help make homeownership affordable to a broader range of borrowers. Easier and more affordable home-buying is made possible by FHA’s more flexible eligibility requirements.
FHA mortgage insurance
FHA mortgage insurance premium (MIP) is one of the risk features that make these loans more accessible to more borrowers. An FHA loan requires two kinds of mortgage insurance.
- Upfront Mortgage Insurance Premium (UFMIP) – This insurance premium is paid as a lump sum when you close on your mortgage loan.
- Annual Mortgage Insurance Premium (MIP) – This insurance premium is paid annually and becomes less expensive each year until you pay off your mortgage.
The good news is that your mortgage insurance premiums can be reduced depending on your down payment and loan term. You can also refinance an FHA mortgage in the future and get rid of MIP.
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FHA Loan Programs
FHA’s adjustable-rate mortgage (ARM) insures home purchases or refinances with rates that can change after the initial fixed-rate period. Depending on market fluctuations after this initial fixed-rate period, your monthly payments could vary due to rates increasing or decreasing. An ARM could be the right choice for you if you plan on staying in your home for just a few years, you’re expecting a future pay increase or the current interest rate on a fixed-rate mortgage is too high.
Fixed-rate mortgages protect you against rising rates since the interest rate remains the same for the loan’s entire term. You can select a 30-, 20- or 15-year term with FHA loans. The main difference is that the lower term options have higher monthly payments, which means you are building home equity faster. Keep in mind you can use equity as a down payment for your next home or a future cash-out refinance. If you plan on staying in your home for a longer time frame, a fixed-rate mortgage could be the right solution for you.
If you currently have an FHA mortgage, we may be able to help you reduce your interest rate and lower your monthly mortgage payments with an FHA streamlined refinance. Plus, a streamlined refinance requires limited borrower credit documentation and underwriting for a more painless process. An FHA Streamline Refinance may be the right solution if you want to convert your ARM to a fixed-rate loan.