Homebuyer Resources

 FHA Current RatesThe pandemic has created opportunities and challenges for anyone thinking about becoming a new homeowner. Interest rates are at record lows and working from home gives buyers more options when it comes to where they set down roots. On the other hand, unemployment is high, and the uncertain economy can make getting approved for a mortgage difficult. So should you buy or not? Here are some things you should know.Is 2021 a good time to buy a house?For many first time home buyers it is. Interest rates dropped to historic lows last year, and they are predicted to remain low for the foreseeable future. According to Housingwire.com, FHA rate guide, that means rates in the low 3% range. For home buyers, it means lower monthly mortgage payments and more house for their money. On the downside, inventory is low and prices are on the rise. House hunting has gotten competitive, and buyers have to decide in advance if they are willing to make an offer over the asking price and exactly how much they can afford to offer.How do you know if this is a good time for you to start house hunting? Here are some important questions to ask yourself.Do you have steady income and dependable employment? Do you have enough money saved for down payment and closing costs?Is your credit score between 580 and 620 or better?Do you have a low to moderate debt-to-income ratio?Buying a home is a long term commitment. If you think you’re ready to take the plunge, but have limited funds and average credit scores, an FHA loan might be right for you.What are FHA loans?FHA loans are mortgages that are financially backed by the Federal Housing Administration (FHA). Though they are often utilized by first-time buyers and those with subprime credit, they are also available to well qualified buyers who have owned a home in the past. Because the loans are backed by the federal government, lenders are willing to take a chance on home buyers who might not qualify for conventional mortgage loans.What’s the difference between FHA loans and conventional loans?Qualifying for FHA loans is easier.Qualifying credit scores are lower for FHA loans.Monthly insurance payments may be lower with FHA loans.FHA has more liberal rules for gifts of money for down payments.FHA loans require an upfront mortgage insurance premium and more complicated appraisals that can make closing costs higher than conventional loans.Check out BusinessInsider.com for an FHA rate guide.Do FHA loans have price limits?Yes, but the amounts vary depending on where in the country you live. For 2021, the FHA has set a price limit range between $356,362 and $822,375. In counties where the median home price is considered low, like Tuscaloosa County, Alabama for instance, the price limit is $356,362. Their average home value in 2020 was $174,000 according to Zillow.com. In San Francisco, California, where the median home listing price is $1.3 million according to Realtor.com, the FHA price limit is $822,375. To find out what the FHA price limit is in your county, you can visit HUD’s FHA Mortgage Limitswebpage.How do you qualify for an FHA loan?You must meet FHA’s minimum requirements to qualify for an FHA loan. In addition to these requirements, the lending institution may have additional stipulations you must meet prior to loan approval.Credit ScoreIf your credit score is 580 or higher you can qualify for a 96.5% FHA loan. If your credit score falls between 500 and 579, you may qualify for a 90% loan. Many lenders require your credit score to be 620 or above to get the best rates and the lowest down payment. Individuals with credit scores below 500 are not eligible for FHA loans.Debt-to-Income RatioTo qualify for an FHA loan, your debt-to-income ratio can’t be more than 50%. To find out what your debt-to-income ratio is, divide your monthly debt total by your gross income. If you have a student loan that’s currently deferred, the underwriter will add 1% of the loan amount to your monthly debt. If you have other types of deferred loans, the underwriter will add 5% of the loan amount to your monthly debt.Down PaymentIf your credit score is 580 or higher, you may qualify for a 3.5% down payment. If your credit score is between 500 and 579, you’ll have to make a 10% minimum down payment. The good news is FHA allows you to use a monetary gift for your down payment. You’ll need a letter from the donor with contact information, the gift amount, the donor’s relationship to you, and a statement saying the money is a gift and not a loan.More good news: There are down payment assistance programs in most states to help first time home buyers. Some are in the form of deferred loans and others are grants with no repayment requirements.Mortgage InsuranceEvery FHA loan requires mortgage insurance to protect the lender in the event you default on your loan. There is an upfront payment requirement of 1.75% of your loan amount. You can pay this at closing or roll it into your loan amount. In addition to the upfront fee, you will have to make a monthly payment of 0.45% to 1.05% of your loan amount annually.If you can make a 10% down payment, you may be able to eliminate your mortgage insurance after 11 years. If you make a down payment of less than 10%, you’re looking at mortgage insurance payments for the life of the loan.Property AppraisalThe FHA has minimum property requirements whether you are buying a single family home, a multi-family home, a condo, or a manufactured home. In order to get loan approval, the property must meet the FHA’s basic liveability and safety standards. In order to determine eligibility, the property you are purchasing must be appraised. An appraisal should not be confused with a home inspection. They are two separate things.How do you apply for an FHA loan?In order to complete an FHA loan application, you will need certain documents. They include, but are not limited to:Your Social Security NumberProof of citizenship or legal residency, proof of right to work in the United StatesBank statements for the last 30 days including deposits (pay stubs)Credit reports, employment records, and tax records may be retrieved by your lenderIs there a downside to FHA loans?If you don’t have the funds to make a 10% down payment, you may have to pay mortgage insurance for the life of the loan.The FHA requires the property to meet stringent health and safety standards.You cannot exceed the price limits set by the FHA. That means no jumbo loans.Lender requirements may differ from the FHA’s minimum standards.

Credit Improvement Tips Without good credit, you’ll find it hard to get approved for a mortgage, rent an apartment, or even get a credit card. You’ll have to pay higher interest rates on any loans you do get. You don’t have to live with bad credit forever though. There are things you can start doing today to improve your credit score and get your life back on track.  8 CREDIT IMPROVEMENT TIPS1. Get Copies of Your Credit ReportsBefore you can start improving your credit score, you have to know what it is and what is on your credit reports. Your credit report is a combination of your repayment history, debt, and how you manage your credit. It also contains information about any bankruptcies, foreclosures, repossessions, and debts that have gone into collections.You’ll need to get copies of your credit report from all three major credit bureaus, Experian, TransUnion, and Equifax. You can get free copies once every year.2. Dispute Errors on Your Credit ReportsThe information on credit reports is not always correct. There can be data entry errors, transposed Social Security numbers, wrong addresses and birthdays, and identity theft. Errors like late payments can significantly reduce your credit score because late payments make up 35% of your score.You have the right to dispute any errors you find under the Fair Credit Reporting Act. You must submit the objection in writing to the relevant credit bureau. The credit bureau must respond within 30 days. The sooner you get inaccurate information off your report, the sooner you can start improving your credit.3. Avoid Adding to Your Credit Card DebtNew credit card purchases raise credit utilization rates. That’s the ratio of credit balances to credit limits that make up 30% of your credit score. Your goal is to keep your credit utilization score below 30%. For example, if you have a credit card limit of $10,000, your balance should not exceed $3000.  4. Pay Off Balances That Are Past DueYour credit history accounts for 35% of your credit score. It’s the leading factor that determines your credit score. The more behind you get on your payments, the more you’re hurting your score.Instead of waiting until the credit card companies or other lenders cut you off or send your accounts to collections, start catching up on the past due amounts. Your goal should be to pay off your accounts. Once you’ve done that the lenders will update your account’s status to “paid in full”. This will look much better than accounts that remain unpaid.5. Don’t Apply For New Credit CardsWhen you apply for new credit, lenders usually conduct a “hard pull”, a credit review that shows on your credit report. The number of accounts you apply for and the number of “hard pulls” there are on your report are used to assess whether or not you're a high risk.If you open a lot of accounts quickly, you send up a red flag. It looks as though you are in financial trouble, and this can further impact your credit score. Having no or just a few newly opened accounts in the recent past indicates financial stability and can raise your credit score.6. Don’t Close AccountsClosing credit card accounts does not improve your credit. If you try to close accounts that have past due balances, the outstanding balances will remain on your report until you pay them off.Even closing accounts with zero balances can adversely affect your credit. 15% of your credit score is the length of your credit history. Your oldest and newest accounts as well as the average age of all your accounts are taken into consideration. The longer your credit accounts are open, the more your score will increase. 7. Get in Touch With CreditorsYour basic instinct might be to avoid your creditors, but if you’re having trouble making payments, you need to do just the opposite. You will probably be surprised at how helpful creditors are. Many creditors have hardship programs that allow you to lower your monthly payments. Keeping the lines of communication open will eventually pay off as you get your balances under control and increase your credit score.8. Pay Off Your DebtThe amount of debt you have accounts for 30% of your credit score. To raise your credit score you have to pay down your debt.There are two common ways to do this, the avalanche method which involves paying off the credit card with the highest interest rate first. You make minimum payments on the others. Once that card is paid off, you move on to the card with the next highest interest, and so on.With the snowball method, you focus on paying off the card with the lowest balance. After that one’s paid off, you start on the card with the next lowest balance.

If you’re in the market for a house, one of the first things you have to do is get familiar with your credit score. You need to know how your score will be evaluated by lenders and what you need to do to improve your chances of getting a loan. The higher the score the more likely you are to get the lowest interest rate, the best terms, and the lowest downpayment.The sooner in the process you do this the better. If your credit score isn’t where it needs to be, paying all your bills on time will help increase it. Keeping your credit card balances below 50% (30% is perfect) will also help. You don’t want to make any major purchases unless you pay all cash for them. Every time you borrow to buy something, you increase your debt ratio.Even though homeowners with FHA, VA, and USDA mortgages can get a mortgage forbearance because of the coronavirus pandemic and ongoing economic crisis, FHA credit requirements for home loans haven't changed.No one really knows what will happen when the forbearance period expires. If defaults spike after that time, FHA may well decide to tighten loan restrictions and require even higher credit scores than before.The general consensus is that you should start monitoring your credit and doing what needs to be done to improve it about 12 months before you start shopping for a new home. It will take more time for some who have lower scores and complicated credit issues.This is not the time to make a major job change. Starting a new business, taking a new job with a different company, changing professions, or changing from a salaried employee to an hourly employee or contractor may make you look risky to a lender. Lenders may or may not take the new economic reality into consideration when looking at employment history.What is a good credit score?According to Experion, one of the three credit reporting agencies, credit scores can be broken into five categories:800-850 is exceptional.740-799 is very good.670-789 is good.580-669 is fair.300-579 is very poor.Most people fall into the 600 to 750 range.What credit score do you need to qualify for an FHA loan?If you have a credit score of 580 or above you may be eligible for a 96.5% loan with a 3.5% downpayment. If your credit score falls below 580, you could be looking at a 90% loan with a 10% downpayment.To put that in perspective, if you’re interested in a $200,000 house and have a credit score of 585, you might qualify for a 3.5% downpayment of $7000. If your credit score is below 580, you may have to come up with a 10% downpayment or $20,000. That’s a difference of $13,000 which is pretty significant for most homebuyers. On top of that, with a lower credit score, you might not get the best interest rate. That will mean a higher monthly payment and more money paid on the loan over time.How do the reporting agencies come up with my credit score?The three agencies use different credit data when calculating credit scores. The data falls into five categories:Payment history = 35%Amounts owed = 30%Length of credit history = 15%New credit = 10%Credit mix = 10%What kinds of items on my credit report hurt my chances of getting a loan?1. No credit history.If you don’t use credit in the traditional sense, the lender will have to get a non-traditional merged credit report or build your credit history using other means.2. Bankruptcy.A past bankruptcy won’t necessarily disqualify you from getting a loan. You have to wait a minimum of two years after a Chapter 7 bankruptcy to apply for a loan and show you have re-established your credit or not incurred new debt.3. Late payments.You will need to show 12 consecutive months of paying all your bills on time.4. Foreclosure.Like a bankruptcy, a foreclosure won’t necessarily disqualify you from getting a loan. You have to wait three years before you can apply.5. Tax liens, collections, and judgments.Before you can close on an FHA loan, all judgments must be resolved.What other FHA credit requirements apply when I apply for a loan?Your debt to income ratio cannot be above 43%.The home you are purchasing must be your primary residence.You must have proof of employment and a steady income.Mortgage Insurance Premium (MIP) is required.

If you have bad credit, you may think that homeownership is out of reach. But there is a government-backed loan program that can help you achieve your dream of homeownership: FHA mortgages. In this article, we'll explore everything you need to know about FHA mortgages for bad credit.IntroductionFHA mortgages are home loans that are backed by the Federal Housing Administration (FHA). The FHA insures lenders against losses that may occur if a borrower defaults on their mortgage. This government backing makes it easier for borrowers with less-than-perfect credit to qualify for a mortgage.In this article, we'll explain what an FHA mortgage is, discuss credit scores and how they impact mortgage eligibility, explain the benefits of FHA mortgages for bad credit borrowers, and provide tips for improving your credit score to increase your chances of qualifying for an FHA mortgage.What is an FHA Mortgage?An FHA mortgage is a home loan that is insured by the Federal Housing Administration. FHA mortgages are designed to make homeownership more accessible to low- and moderate-income borrowers who may have difficulty qualifying for conventional mortgages.Unlike conventional mortgages, FHA mortgages have more lenient credit score requirements and lower down payment requirements. FHA mortgages also have limits on the amount that can be borrowed, which vary depending on the location of the property.To qualify for an FHA mortgage, borrowers must meet certain requirements, including:A minimum credit score of 500A down payment of at least 3.5% (although borrowers with a credit score of 580 or higher may be able to qualify for a lower down payment)A debt-to-income ratio of 43% or lessUnderstanding Credit ScoresCredit scores are a key factor in determining whether you qualify for a mortgage, and if so, what interest rate you'll be offered. Credit scores range from 300 to 850, with higher scores indicating better creditworthiness. FHA mortgages are designed to help borrowers with less-than-perfect credit, so they have lower credit score requirements than conventional mortgages. However, borrowers with higher credit scores may be able to qualify for better interest rates and lower down payments. You can check your credit score here.Benefits of FHA Mortgages for Bad CreditThere are several benefits of FHA mortgages for bad credit borrowers, including:Lower down payment requirements: FHA mortgages require a minimum down payment of just 3.5%, which can be a significant advantage for borrowers who have limited funds for a down payment. You can view a list of downpayment assistance programs here.More lenient credit score requirements: FHA mortgages have lower credit score requirements than conventional mortgages, which makes them more accessible to borrowers with bad credit.Lower interest rates: Because FHA mortgages are backed by the government, lenders are able to offer lower interest rates than they would on conventional mortgages.More flexible underwriting criteria: FHA mortgages have more flexible underwriting criteria than conventional mortgages, which means that borrowers with bad credit may be able to qualify for a mortgage even if they don't meet all of the traditional requirements.Qualifying for an FHA Mortgage with Bad CreditTo qualify for an FHA mortgage with bad credit, you'll need to meet certain requirements. These include:A minimum credit score of 500: To qualify for an FHA mortgage, you'll need a credit score of at least 500. However, borrowers with a credit score of 580 or higher may be able to qualify for a lower down payment.A debt-to-income ratio of 43% or less: Your debt-to-income ratio is the amount of your monthly income that goes towards paying off debt. To qualify for an FHA mortgage, your debt-to-income ratio must be 43% or less.A down payment of at least 3.5%: FHA mortgages require a down payment of at least 3.5%. However, there are some programs available that can help borrowers with down payment assistance.FHA lenders also consider other factors when evaluating mortgage applications, including employment history, income, and the property itself. It's important to work with a knowledgeable lender who can help you understand your options and guide you through the application process.Frequently Asked QuestionsQ: What is the minimum credit score required for an FHA mortgage?A: The minimum credit score required for an FHA mortgage is 500. However, borrowers with a credit score of 580 or higher may be able to qualify for a lower down payment.Q: How much down payment do I need for an FHA mortgage?A: FHA mortgages require a minimum down payment of 3.5%. However, borrowers may be able to qualify for down payment assistance programs.Q: What are the income requirements for an FHA mortgage?A: There are no specific income requirements for an FHA mortgage, but borrowers must have a debt-to-income ratio of 43% or less.Tips for Improving Your Credit ScoreImproving your credit score can increase your chances of qualifying for an FHA mortgage. Here are some tips for improving your credit score:Pay your bills on time: Late payments can have a negative impact on your credit score.Reduce your credit card balances: High credit card balances can lower your credit score.Monitor your credit report: Check your credit report regularly for errors or fraudulent activity.Don't apply for new credit: Applying for new credit can lower your credit score.ConclusionFHA mortgages are a great option for borrowers with bad credit who want to achieve homeownership. With lower down payment requirements, more lenient credit score requirements, and lower interest rates, FHA mortgages can make homeownership more accessible to those who might not qualify for a conventional mortgage.If you're interested in an FHA mortgage, it's important to work with a knowledgeable lender who can guide you through the application process and help you understand your options. By improving your credit score and taking advantage of down payment assistance programs, you may be able to qualify for an FHA mortgage and achieve your dream of homeownership.Additional ResourcesIf you want to learn more about FHA mortgages for bad credit, check out these additional resources:HUD.gov: FHA LoansConsumer Financial Protection Bureau: What is an FHA Loan?NerdWallet: FHA Loans: Everything You Need to Know

The Federal Housing Administration (FHA) insures mortgages made by FHA approved lenders. Since 1934, it has insured tens of millions of single and multi-family residential properties in all 50 states and U.S. territories. It ensures more mortgages than any agency in the world.Basic Requirements Include:Minimum FICO score of 580 for 3.5% down paymentMinimum FICO score between 579 and 500 for 10% down paymentMortgage Insurance Premium (MIP) requiredMaximum debt-to-income ratio of 43%Proof of employment and steady incomeProperty purchased must be used as the primary residence by the buyer About FHA Home LoansFHA loans are like typical home loans except that the loan is insured by the Federal Government. With FHA home loans, borrowers can get financing with as little as 3.5% down. They are especially popular with first-time homebuyers. Even people who have suffered past bankruptcies and foreclosures are able to qualify for FHA loans.2020 FHA Credit RequirementsA minimum credit score of 580 is required to qualify for a 3.5% down payment. If your score is 579 or below, you’ll need 10% for your down payment. This should make it apparent that your credit score matters and can end up either saving or costing you a lot of money.You need to keep in mind that there is a variety of data that goes into your FICO score. In addition to your payment history, lenders use foreclosures, bankruptcies, and late payments reflected on your credit report to help determine eligibility for a loan. Lenders have the right to require higher credit scores than those set by the FHA. The credit standards they require must be in accordance with the Fair Housing Act and other federal laws.What is a FICO ScoreYour FICO score helps lenders determine how creditworthy you are. FICO stands for Fair Isaac Corporation. They were the first company to put a score to credit versus risk. The data analytics company compiles consumer credit from different credit bureaus to compute scores.The lender takes this information and analyzes it to determine whether or not you are a good credit risk. The higher your score is the more likely you are to get the loan you apply for at the lowest interest rate.FHA Loan Credit IssuesWhen you make your payments on time on a regular basis, you are more likely to get approved for a loan. Here are some of the things lenders find on credit reports that can make it harder for borrowers to get loans.No History of Credit.If you haven’t established a credit history or don’t use traditional credit, the lender will have to find another way to establish some kind of credit history.Late Payments.The best time to apply for an FHA loan is when you have had 12 continuous months of on-time payments for all your financial obligations.Foreclosure.Having a foreclosure in your past will not automatically disqualify you for a loan. It depends on the circumstances.Bankruptcy.Like a foreclosure, a past bankruptcy will not automatically disqualify you for a loan. You’ll have to wait two years before you can apply for a loan and show that you have re-established your credit or have not incurred new debt.Tax Liens, Judgments, and Collections.Before you can finalize an FHA loan, any outstanding judgments must be resolved or paid off. This can be done before or at closing.Benefits of Choosing FHA Home LoansEase of Qualifying.FHA loans are generally less restrictive than other types of loans. Borrowers find it easier to qualify with lower credit scores and questionable credit histories.Interest Rates Are Competitive.Lower interest rates make homeownership more affordable because they help keep monthly payments reasonable. This makes it easier for borrowers with lower credit scores to avoid subprime mortgages and their negative features.Foreclosure / Bankruptcy.Past foreclosures and bankruptcies don’t disqualify borrowers. Re-establishing credit and making payments on time help borrowers meet the FHA’s requirements. Credit History Determination.Lenders can use a variety of different ways to analyze your credit history. This includes utility bills, student loans, and rent. What they are looking for is a pattern of reliability.FHA vs. Conventional LoansMany borrowers choose FHA over conventional financing because the down payments are lower, the interest rates are lower, and there are unique refinancing options.Down Payment Requirements.With a conventional loan, you may need as much as 20% for a down payment. With an FHA loan, all you need is 3.5% as long as your credit score is 580 or above. Your down payment has to come from approved sources, like cash on hand, a savings account, investments, or gifts.Mortgage Insurance.If you pay less than a 20% down payment on a conventional loan, you are required to pay Private Mortgage Insurance (PMI). With an FHA loan, you pay an insurance premium for the insurance on the loan. This is referred to as the MIP or mortgage insurance premium. 2020 Down Payment AssistanceThe cash necessary to make a down payment is often the stumbling block for potential homebuyers with limited means. Down payment assistance in the form of free grants, deferred loans, and low-interest loans help solve this problem. To get help with the down payment, the home you are purchasing usually has to be your primary residence and be located within a specific state, county, or city. Many programs require you to complete a homebuyer education course.Income limits usually apply and may look something like this:$39,050 - 1 person household$44,600 - 2 person household$50,200 - 3 person household$55,750 - 4 person household$60,250 - 5 person household$64,700 - 6 person household$69,150 - 7 person household$73,600 - 8 person householdHousehold income is defined as the total income of every member of the household (18 or older) who will be living in the purchased property.Down Payment GiftsMany borrowers need help getting the cash for their down payments. Although using gifts of cash is acceptable to the FHA, it is very specific about the source of those gifts. You will have to provide documentation regarding the source. The following gift benefactors are acceptable to the FHA:Borrower’s family membersBorrower’s labor union or employerA charityA government or public entity that provides homeownership assistance to moderate to low-income families or first-time homebuyersFHA Loan Limits for 2020The FHA has limits on the amount of money it will insure. These limits vary by location and type of housing, such as single-family or duplex. Lending limits are calculated annually. Some homebuyers choose to shop for houses in areas where the lending limits are high, and others look for homes in areas that fit within their budgets.LOW-COST AREAS2020 LimitsSingle Family - $314,515Duplex - $403,125Triplex - $487,250Four-plex - $605,525HIGH-COST AREAS2020 LimitsSingle Family - $726,525Duplex - $930,300Triplex - $1,124,475Four-plex - $1,397,400FHA Closing CostsThe FHA determines what closing costs can be charged to the borrower. What specific costs are considered customary and reasonable are determined by local FHA offices.Lender’s origination feeAppraisal FeeHome Inspection Fee - up to $200Property SurveyTitle InsuranceTitle SearchDeposit Verification FeeCredit ReportTest and Certification FeesAttorney FeesDocument Preparation (prepared by a third party)According to the FHA, a third party or the seller may contribute up to six percent of the property sale price or appraisal value, whichever is less, to offset the buyer’s closing cost, discount points, prepaid expenses, and other financing concessions.FHA Home Loans ChecklistBorrowers need to make sure everything required by the lender, seller, and title company is on a closing checklist. The checklist should include the fees that must be paid, the information that must be provided, and the disclosures that must be signed before the title can be conveyed to the buyer.Identification.All parties to the closing will need to provide valid identification.Title Insurance Policy.The borrower must pay for title insurance guaranteeing the property is free of liens and claims.Homeowner’s Insurance Policy.The borrower must have homeowner’s insurance in place before the transaction can close. Homeowner’s insurance insures the property against damage.Closing Funds.The borrower must have all the agreed-upon funds at closing. The funds must be certified or sent via electronic transfer. Mortgage Insurance Premium (MIP)The FHA requires mortgage insurance to protect lenders in the event the borrower defaults on the loan. The length of time borrowers are required to carry MIP is either 11 years or throughout the life of the loan depending on the terms and conditions of the loan.Debt Ratio and FHA LoansIn order to prevent families from getting into loans, they can’t afford, the FHA has put debt-to-income ratio requirements in place. Lenders use these numbers to calculate whether or not the borrower is in a position to meet the demands that come with homeownership.The FHA allows the buyer to use 31% of their income for housing costs and 43% toward housing expenses and long-term debt.First Time HomebuyersQualifying as a first-time homebuyer doesn’t mean you have never owned a home before. There are several circumstances that can qualify you as a first-time buyer.Spouses and individuals who have not owned a home in the previous three yearsDisplaced homemakers who have only owned a home with a spouseSingle parents who only owned a home with a former spouse while they were marriedIndividuals who have only owned a home, not in compliance with state or local building codes and that can’t be brought into compliance without exceeding the cost of building a permanent structureIndividuals who have only owned a home not permanently affixed to a foundation as defined by applicable regulations

Buying a house is the biggest financial investment most people make in their lifetime. To be as informed as possible, it’s important to understand exactly what you are paying for and how the costs are calculated. One of the most misunderstood and overlooked items included in your monthly mortgage payments is mortgage insurance.  Mortgage insurance should not be confused with homeowner’s insurance. The line item added to your monthly payments every month and labeled insurance does not protect you from natural disasters, theft, or liability if someone gets hurt on your property. Homeowner’s insurance is a separate insurance policy you have to take out before you can close on the property you are buying.  What is Mortgage Insurance?Mortgage insurance protects the lender in the event you default on your loan. It also allows borrowers to buy homes with less than 20% down. This is a value for many people who don’t have enough money saved to make a substantial down payment.  Mortgage insurance is an added cost for borrowers. Borrowers must pay an initial mortgage insurance premium equal to one and three-quarter percent of their loans. In addition to the up-front premium, there is a monthly mortgage insurance premium (MIP) that can vary anywhere from 0.45% to 1.05% of the loan.  How Much Does Mortgage Insurance Cost?The 2 different types of mortgage insurance associated with FHA loans are as follows:Upfront Mortgage Insurance Premium (UFMIP)This is a lump sum paid at the beginning that is equal to 1.75% of your mortgage loan amount. You can pay it in cash or request that the seller pay it, but most of the time the UFMIP is added to the loan amount. For example, if you borrow $200,000 at 3.75% interest, your UFMIP will be 200,000 x 1.75% or $3500. You add the $3500 to your $200,000 for a total loan amount of $203,500. The addition of the UFMIP to the original loan amount in this example will increase the monthly payment by about $15. If you switch to another FHA loan within seven years of the start of your mortgage, you can get a partial refund of the premium, but you’ll have to pay a new premium as a part of the refinance. Mortgage Insurance Premium (MIP)The other type of insurance required by FHA is the MIP. This a yearly charge but you pay it monthly as part of your mortgage payment. The amount added to your monthly payments depends on the down payment you made. For example: Using the example above, your total loan amount (with the UFMIP added to it) is $203,500. If you made the minimum down payment of 3.5%, you would multiply the $203,500 by an MIP factor of 0.85% to get the annual charge of $1729.75. Divide the $1729.75 annual charge by 12 to get the monthly charge of $144.14. This amount is added to your monthly mortgage payment. Pros of FHA Mortgage InsuranceLenders can accept lower down payments.The insurance you pay reduces the financial risk associated with default. This gives lenders more flexibility when it comes to approval guidelines. Qualifying for a home loan is easier.One of the reasons FHA loans are so popular is because first-time homebuyers without superior credit and low debt-to-income ratios can still qualify for them. If your credit rating is at least 580, you are eligible for a 3.5% down payment. The FHA allows a debt-to-income ratio of 43% (in some cases higher). Credit scores don’t change mortgage insurance rates.Your mortgage premium is going to be the same no matter what your credit score is. That means your monthly payments will be a lot lower than if you had gotten a comparable conventional loan. Cons of FHA Mortgage InsuranceIt increases monthly payments. FHA's insurance is higher than that required by any other kind of low down payment loan. Over 30 years, the amount of insurance you pay adds up to a significant amount. It’s with you for the life of your loan.As long as you are paying on your mortgage, you will have mortgage insurance added every month if you made a minimum down payment. It doesn’t matter how much equity you build up. That makes is very expensive when you compare it with conventional loans that don’t require any mortgage insurance if you make a 20% down payment. Can I Avoid Mortgage Insurance?There are only three ways to eliminate mortgage insurance on an FHA loan. 1. Pay off your loan in full.If you pay off your mortgage, you own the house free and clear. This eliminates mortgage insurance and your monthly mortgage payments. 2. Switch to a conventional mortgage.If you have 20% equity in your house or have the means to pay down your mortgage to 80%, you can switch to a conventional mortgage and eliminate mortgage insurance. There are credit score and interest rate issues associated with conventional mortgages that can impact whether or not it makes economic sense to refinance. You should do a cost comparison before you pay for an appraisal and refinance. 3. Make a 10% down payment and pay the mortgage insurance for 11 years.This option won’t eliminate mortgage insurance immediately, but if you have the resources to make a 10% down payment, the FHA will cancel the premiums after 11 years. Eliminating MIP on Loans Made Before June 3, 2013.One of the advantages of conventional loans is that mortgage insurance is automatically eliminated once your loan is 78% of the value it had when your house was purchased. Until June 3, 2013, the same applied to FHA loans. Unfortunately, the FHA changed the guidelines for loans made after June 3, 2013. Here are the new guidelines for getting rid of your FHA mortgage insurance based on your down payment and the terms of your loan. 20 - 30-year loan with less than 10% down payment = 78% loan to value with a 5-year minimum 20 - 30 year loan with 10% - 22% down payment = 78% loan to value with a 5 year minimum20 - 30-year loan with more than 22% down payment = 5 years 15-year loan with less than 10% down payment = 78% loan to value 15 year loan with 10% - 22% down payment = 78% loan to value 15-year loan with more than 22% down payment = no MIP required What’s the Difference Between FHA's Mortgage Insurance and Conventional Loan Mortgage Insurance?There are three major differences between FHA and conventional loan mortgage insurance. 1. You only pay mortgage insurance on a conventional loan if you make less than a 20% down payment. 2. You only need one kind of mortgage insurance with a conventional loan. With an FHA loan, you need two, upfront and annual. 3. Conventional loan mortgage insurance is influenced by how much money you put down and your credit score. It can also be influenced by where the purchased property is located and how many people are on the loan. If your credit rating is less than 680, you should consider going with the FHA to finance your home purchase. You won’t pay more mortgage insurance because you have a lower score, and you have the option of switching to a conventional loan if your credit rating improves.

Mortgages are at historically low rates. If you’ve been living in your home for ten years or more, you might want to consider refinancing. The general refinancing rule of thumb is that it’s a good idea if you can reduce your interest rate by 2%. Many lenders will tell you however, that a 1% savings is good enough to consider refinancing.Reducing FHA rates does more than save you money. It increases the rate with which you build equity in your home at the same time it decreases your monthly mortgage payment. Example: A 30 year fixed rate mortgage on a $100,000 house with 5.5% interest has an interest and principal of $568. The same loan with an interest rate of 4.1% has a monthly payment of $483.It’s easy to calculate whether or not it makes sense to refinance using one of the many available online refinance calculators.FHA Simple RefinanceA simple refinance is pretty straightforward. You end your current mortgage and enter into a new one with a lower interest rate. It doesn’t matter whether the rate is fixed or adjustable but there is not a cash out option. There are credit, income, and asset requirements to qualify for a simple refinance.This refinance option requires an appraisal to determine your home’s increase in value. You are allowed to include your closing costs and pre-paids into the new loan as long as the amount of the mortgage does not exceed the appraisal value - 97.75% loan to value.Benefits of a Refinance:It lowers your monthly payments. This gives you more disposable income every month.You can switch from an adjustable rate mortgage to a fixed rate mortgage. When you do this, you know what your mortgage payments are going to be throughout the term of the loan. With a fixed interest, you don’t have to worry about your payments going up. You can shorten the term on your mortgage and pay your house off earlier than you had imagined.FHA Streamline RefinanceA streamline is a quicker and easier way to refinance. You may not need an appraisal, and there’s less paperwork for the lender, saving you money and time. Qualifications for a streamline refinance include:You must have an existing FHA insured mortgage.Your mortgage must be current.You cannot have made more than one late payment in a year.Your most recent six months payments must have been made on time.You must make payments on your original mortgage for a minimum of 210 days before you apply to refinance.You must be getting a tangible benefit of at least 0.5 percentage points reduction in the combine Mortgage Insurance Premium (MIP) and FHA rates or a refinance from an adjustable rate mortgage (ARM) to a fixed rate mortgage (but no more than 2 percentage points more than the combined MIP and interest rate).The new mortgage cannot exceed your original mortgage.You cannot get more than $500 cash in the refinance.Simple Refinance vs. Streamline RefinanceIf your house hasn’t increased much in value or you plan to sell in the near future, you’re probably better off going with a streamline refinance. With a simple refinance, you keep your costs low and can get a lot lower interest rate depending on the equity you have in your home.FHA Cash Out RefinanceFor homeowners who need cash and have equity in their homes, a cash out refinance can be a good option. You will need a current appraisal and a minimum of 20% equity based on that appraisal.Requirements:Credit Score:500 is the official FHA minimum credit score, but realistically you will need a score in the 600 to 660+ range before your lender will approve a refinance. If your score is in the high 500s, you may still be able to do a cash out refinance. FHA will approve it, but you’ll have to find a lender willing to take the risk.Debt to Income Ratio:Generally speaking, the maximum debt to income ratio allowable is 43% unless there are mitigating factors like an unusually high credit score or an abundance of equity. Under certain circumstances, lenders will accept up to 50%.Loan Limits:In 2020 the maximum FHA loan limit ranges from $331,760 for low cost counties to $765,600 in high cost counties.95% and 85% cash outs are a thing of the past. On September 1, 2019, it was lowered to 80%. Since a cash out refinance is considered a debt, it is not taxable, but you should still consult your accountant before you file. There is no seasoning requirement with a cash out. Non-occupant co-borrowers are not allowed. Second mortgages can’t be added to cash outs unless the total of the two loans add up to 80% or less of the value of the home.FHA Rehab MortgagesIf you decide to buy a fixer-upper, you may be able to get a 203(k) loan that includes the primary loan or refinance along with the funds to rehab it. The money can only be used for certain things however.Reconstruction and alternation of the structureImprovements and modifications to the home’s designElimination of hazards related to health and safetyImprovements to appearance and elimination of obsolescenceReplacing or reconditioning of plumbingWell and/or septic system installationAddition of floors and/or flooring treatmentsAccessibility enhancements for the disabledEnergy conservation improvementsTo qualify for a 203(k) loan, you’ll need a minimum credit score of 580, but expect the lender to be looking for something more in the range of 620-640. Your debt to income ratio can’t be more than 41% to 45%. You have to have 3.4% or more equity in the home to qualify. The loan amount (including renovation and purchase) must be less than the maximum loan amount where you live. The home you are renovating must be your primary residence.Basic Rules for FHA LoansYou must be an owner occupant. This means you are using the home are your primary residence. It cannot be a rental property or any other type of real estate investment.You don’t necessarily have to be a U.S. citizen to get a loan. You cannot be an illegal alien, but you can be a legal permanent or non-permanent resident.Disadvantages of RefinancingClosing costs and refinancing fees are expensive, It can cost as much or more than your original mortgage.Going from a fixed rate mortgage to an adjustable rate mortgage can increase FHA rates.If you do a cash out refinance, you’ll lower the equity in your home which may cause you to have to pay private mortgage insurance.What Goes Into Your Mortgage PaymentWhen you consider refinancing, you have to factor in more than just the basic loan amount. A lot more goes into the payment you make every month.PrincipalInterestTaxesHazard InsuranceMIPFlood InsuranceHOA or Condo Association dues, fees, and related expensesGround Rent (if applicable)Special AssessmentsPayments for Secondary FinancingOther Assessments 

1. Plan for Your Down PaymentIf you don’t know how much money is required for a down payment, you won’t know what your savings goal should be. You might be looking at a 3.5%, 10%, or even a 20% down payment depending on your credit score and the type of loan you want.Knowing what percentage of the purchase price you need for a down payment will get you started, but you’ll also need to know how much house you can afford. For this information, you will probably need the assistance of a lender.If you’re aiming for a 3.5% down payment, you have to be sure your credit score is 580 or higher. If you’ve got some credit issues, but can make the 10% down payment, your FICO score must be between 579 and 500. If your credit score is below 500, you won’t get FHA financing and need to concentrate on improving your score before considering homeownership.As long as lenders abide by the Fair Housing Act and other applicable federal laws, they have discretion when it comes to the credit scores they require. You may find the requirement to be higher than you anticipated.If you really want to pay off your mortgage as soon as possible or want to reduce your monthly payments as much as you can, you should consider making a bigger than required down payment. The lower the balance you start off with, the sooner you’ll own your home free and clear.A lot of borrowers don’t have the financial option of making a big down payment. Others are in no hurry to pay off their mortgages and instead of saving for a substantial down payment prefer to become homeowners sooner rather than later. You should base your decision on your personal goals and financial situation.You can’t forget about closing costs when you are calculating the amount of money needed to buy a house. Down payments and closing costs are two separate things. There will be several transaction and document fees required at closing that don’t count as part of your down payment. Consider asking the seller to help with the closing costs. The FHA allows this up to six percent. Explore Downpayment Assistance Options2. Decide What Type of Home You’re Looking ForHome loan preparation includes narrowing down your search before you start looking. Do you want a condo or a fixer-upper? The FHA has different loan requirements depending on your answer. Some loans take longer to process than others. Lenders may consider loans for certain types of property differently from others.It probably won’t make a difference in your down payment or interest rate if you consider both condos and single-family homes. It will make a difference if you are considering building a house, which could require an FHA One-Time Close construction loan. Requirements for these loans include hiring approved contractors and how the funds from the loan will be used to pay for them.The sky is not the limit when it comes to the purchase amount allowed by the FHA. It will only insure so much. The maximum it insures depends on the type of property you’re buying and where in the country you live.About 80% of the country falls into the low-cost area where the FHA lending limit for a single-family home in 2020 is $331,760. For the 20% that fall into the high-cost area, the limit in 2020 for a single-family home is $765.600. 3. Set Financial Goals to Get the Mortgage You WantWhen you’re thinking about the house you want to buy, it’s a good idea to factor in your long term goals. If you plan to wait until you can afford the house of your dreams, one you‘ll stay in for the long term while you raise your family, your strategy should be to aim for a fixed-rate mortgage.If on the other hand, you’re buying a starter home or know you will relocate for business in a few years, you might decide to roll the dice and go with an adjustable-rate mortgage, hoping interest rates will stay low until you decide to sell.This can be an especially good idea if you know you’ll be moving within five or six years. A hybrid 5/1 adjustable-rate mortgage (5/1 ARM), gives you a five-year introductory fixed rate of interest before it starts to adjust on an annual basis.Not everyone has the luxury of knowing what the future holds though. If you’re unsure about how long you’ll be in the house you’re thinking about buying, the common wisdom is to play it safe with a fixed-rate mortgage.