FHA Mortgage Loans and Rates (FHA Guide for Millennials)

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You may have heard that the current FHA mortgage rates continue to be offered near record low levels this year. People who are weary of paying rent may think that they have no choice because who can afford to put 20% down to buy a home? Fortunately, it’s a myth that 20% is needed to buy a home in America today. With a home mortgage from the FHA, millennials can buy a home much sooner than you might think.

Talk to Government Approved FHA Mortgage Lenders that have access to affordable financing for home buying, refinancing and energy efficient upgrades.

Talk to Government Approved FHA Mortgage Lenders that have access to affordable financing for home buying, refinancing and energy efficient upgrades.

All signals point to Trump backing FHA mortgage financing with key appointees such as Ben Carson and Brian Montgomery. If the Department of Housing and Urban Development and the Federal Housing Administration can keep FHA mortgage products aggressive with flexible credit and reasonable down-payment requirements then we anticipate the home-ownership rates to finally rebound in the United States.

See Flexible Loan Guidelines and Historically Low FHA Mortgage Rates

Below is brief guide for millennials looking to getting an FHA mortgage in 2017. After you learn what an FHA mortgage loan is all about, talk to your approved FHA lender to see if you can qualify. More likely than not, you can get approved for great FHA mortgage rates pretty soon, and no longer pay your landlord’s mortgage: You can pay your OWN mortgage!

What’s an FHA Mortgage?

The FHA mortgage was born in 1934. According to HUD.gov during the 1940’s, FHA programs helped finance housing for returning veterans and their families after the war. Since then, FHA mortgage products have become a staple in home financing sectors across the United States. Today’s FHA mortgage rates are being advertised at near record lows and this helps the housing market recover.

An FHA mortgage loan is insured by the Federal Housing Administration. When we say ‘backed,’ this just means that if you do not pay your loan, the bank forecloses and the lender is reimbursed most of the loan’s balance by FHA. To pay for that guarantee, each borrower is required to pay monthly mortgage insurance, which is approximately .85% of the loan amount.

Highlights of the FHA Mortgage Program

There are good reasons that FHA today underwrites approximately 20% of home loans in the US: There are many great benefits to FHA mortgages! Here are the critical ones:

  • 5% Down Payment: It is nonsense that you have to have 20% down to get a mortgage. An FHA-loan application can approved for people with a 580+ credit score with only a 3.5% down payment. This makes it much easier for millions of people to get a loan. Save your money for home renovations!
  • Low Credit Scores OK: Some approved FHA-lenders will approve you with a very low score of 500. However, you have to put 10% down in that case to qualify for a FHA home loan with bad credit. Better is a 580 or higher score for a 3.5% down payment. If you have a 620 or higher score, credit will not stop you from getting an FHA loan; other factors might, but a score that high isn’t going to be the problem.
  • Easy Refinance Options: FHA has a great program called the FHA Streamline Refinance. If you have an FHA insured loan that you have been paying on time for at least six months, you may be able to refinance into a lower rate. If rates have dropped by .5% or so, you can probably save substantially with a refinance. Closing costs can be wrapped into the loan, and you still will save on your payment.
  • Historically Low FHA Mortgage Rates: With the FHA guarantee of your lien, you can often get a rate that is lower than conventional rates. Hard to believe, but true. According to Zillow, as of August 2017, FHA financing was available at approximately 3.625% for a 30-year fixed. The current FHA mortgage rates are competitively priced when compared to other conventional options such as  Fannie Mae and Freddie Mac.
  • Higher Debt to Income Ratio: FHA underwriters have flexibility on your debt to income ratio. It is possible to get approved with a total debt to income well above 40% in some cases
  • Gift Funds Allowed with FHA: You can get your entire down payment from a relative as a gift. You just need a letter from the person stating that it is a gift and that you do not need to pay it back.
  • 15 and 30-Year Loans Available: adjustable rate mortgages and hybrid ARM’s are also available.
  • Assumable: This means that your loan can be assumed when you sell the home. The buyer needs to qualify of course, but this can be a substantial benefit in a rising interest rate environment. If your rate is 1% lower than current rates, this would make your home quite attractive for some buyers.
  • Closing Cost Help: The seller can pay up to 6% of your FHA mortgage closing costs. Ask about seller financing with FHA home loans.

Minimum Credit-Score for FHA

As noted above, you need a minimum 500 credit score to get a 10% down loan. For a 3.5% down loan, you need a 580-credit score. Experts advise that you improve your credit score substantially if you have under a 580. There are relatively few lenders that will work with people with that low of a score. Your options definitely improve when you have a score above 580, or even better, 620.

Millennial First Time Home-Buyers Welcome

Many people think that FHA mortgages are only for bad credit, low income buyers. This is not really true. FHA financing does have more flexible credit requirements, but there is no limit on income at all. You can get an FHA first-time home buyer mortgage with a $40,000 income or a $400,000 income.

FHA mortgage rates today remain affordable and they are actually very popular with first time buyers because of their flexible credit criteria, as well as low down payments. It’s hard for many first-time buyers to afford a down payment because they do not have equity in a current property.

Millennial home buyer, Scott Carter-Wilson of Riverside, California said, “My realtor suggested I look at FHA for financing because of the minimal deposit requirements.” “The FHA mortgage lender was also forgiving of my past credit issues”, said Carter-Wilson. This was great news for this millennial that was tired of renting.

Shop for current FHA mortgage rates now and compare, loan terms, interest rates and closing costs from trusted FHA mortgage lenders in your region.

Shop for current FHA mortgage rates now and compare, loan terms, interest rates and closing costs from trusted FHA mortgage lenders in your region.

Low Income OK

The FHA mortgage can be a good option for people with lower income, too. FHA gives lenders more flexibility on your debt to income ratio than a conventional mortgage. A high number of low income borrowers are easily approved by an FHA mortgage lender. Historically, FHA has been instrumental in low-income first time home buyers successfully securing affordable housing.

Loan Limits on FHA Mortgages

There are certain requirements for the home you want to buy. The current FHA loan limit for low cost areas in the US is $275,000. For higher cost areas such as Los Angeles, the limit is $636,000. If your home is higher than that, you will need to get a conventional loan.

Look Up 2017 FHA Loan Limits

Who Are Good Candidates for FHA Mortgage Programs?

Many people are excellent candidates, but most borrowers fall into one of more of these categories:

  • They have a low credit score, possibly with a recent bankruptcy or foreclosure. You still can get a loan after one of these negative financial events, but you usually need to wait two years.
  • People who don’t have the cash for a 20% down payment
  • People who need to receive their down payment as a gift
  • High debt to income ratio
  • First time house buyers (whether you are a millennial or baby-boomer, the Federal Housing Administration doesn’t care about your age, as long as you meet the 2017 FHA guidelines.)

Today’s FHA mortgage rates have fallen back near record low-levels. The FHA mortgage program is very popular in the US because it is so easy to be approved. Talk to HUD approved lenders today and apply for a FHA mortgage today so that you can stop paying rent and start paying for your own home.

What Are the Basic FHA Mortgage Requirements?

Residency – According to the Department of Housing and Urban Development, borrower are required to be lawful U.S. residents with a valid Social Security number, and she must be the occupant of the home.

Employment History –  In most cases, applicants should be able to document steady employment within the past twenty four months. Self-employed applicants will need to document their business and personal income from their business for a two year minimum. Typically the Direct Endorsed Underwriter will require the lender verify tax returns, bank statements, 1099s and W2’s if applicable.

Debt to Income – This is determined by borrower’s gross income versus their monthly obligations and it should be less than 43%. There is some flexibility with the DTI, depending upon the which FHA mortgage program you are applying for.

Top 10 Secrets to Qualify for FHA Mortgage Program

People who want to own their own homes in the US often turn to the FHA program. Backed by the Federal Housing Administration, the FHA loan has been the backbone of the mortgage market in the US for many decades.

The FHA mortgage program makes it possible for millions of Americans to own their home. Without this vital program, many people would have to rent where they live instead of owning. It is in the interest of the US government and the American economy for more people to own homes, as long as they can prove on paper that they can afford them.

If you want to qualify for the FHA mortgage program, you should know about the secrets we list below. Once you fully understand what you need to do to get an FHA mortgage, you should contact your FHA-approved lender to get pre-qualified.

We also mention some of the other aspects of FHA mortgages that make them such a strong product.

#1 Qualify with as Little as 500 FICO Score

Many people do not think that they can qualify for a home loan. After the mortgage market crash of 10 years ago, it became harder to get a home loan. There were far too many home loans given out to people without ensuring that they had the income to pay the mortgage.

It is true that mortgage lending standards have been tightened, but many renters are shocked to learn that they can get an FHA mortgage with a FICO score as low as 500. This is a very low credit score that often happens when people have a major negative credit event, such as a foreclosure.

People should understand that the Federal Housing Administration has very flexible standards for credit to qualify for a FHA mortgage loan. The minimum score is 500, but your lender may have a higher standard.

The good news is that there are thousands of FHA-approved lenders out there. So, if you do not have a score that is high enough, you can always check out another lender.

While it is possible to get a loan with a 500-credit score, it is recommended to have at least a 580. But if you have a low score, do not despair – you still may be able to get approved!

If you have a FICO score of above 720, you may be better off to apply for a conventional loan. However, if you do not have a large down payment available, an FHA loan can still be a good fit for you.

#2 Be Financially Stable After Bankruptcy or Foreclosure

Many renters think that their foreclosure or bankruptcy a few years ago means that they cannot get a FHA home mortgage. This is wrong. What is true is that a foreclosure or bankruptcy can stay on your credit report for up to 10 years; seven years is most common.

Because of this, people tend to believe that it is impossible to get any type of home loan. Actually, FHA mortgages are available to people who had such a negative event on their credit as recently as a year ago. But more often, you should have your foreclosure or bankruptcy at least two years ago.

What FHA wants to see is that you have recovered financially and are back on your feet. Your lender will want to see that you are paying your bills and rent on time. If so, you may be able to get approved. Remember, FHA exists to help people with average to poor credit to have access to the home loans. The agency has set flexible standards that are possible for many people to qualify for.

#3 Have a 3.5% Down Payment

Don’t believe that you have to pony up a 20% down payment to buy a house. If that were true, less than 50% of Americans would ever own a home; the current number is in the range of 62%.

Competitive FHA mortgage rates are available to people with a 580-credit score with only 3.5% down. Plus, you can get your entire down payment from a relative or friend. So, you can technically get into a home with zero down! Your down payment also can come from your savings or from an investment account.

If you have a 500 FICO, you will have to put down 10%.

#4 DTI Limit Is 41%

FHA wants to see that you will have the ability to repay your loan. So, you should not have a debt to income ratio of higher than 41%. This means that all of your debt payments, including your mortgage, should not exceed 41% of your gross monthly income.

If you have a higher DTI, you may be able to qualify if you have a higher credit score or higher down payment.

#5 Only for Owner-Occupied Properties

FHA mortgage loans are only for homes that are occupied by the owner of the property. If you want to get a rental property, it would need to be at least a duplex; you would live in one side of the property and rent the other side out.

#5 Self Employed Can Qualify

You do not have to have a regular job to qualify for an affordable FHA mortgage interest rate. The self employed usually need a profit and loss statement for the year, and two years of tax returns.

Other borrowers need to show their pay stubs, W-2s and tax returns to qualify.

#6 Maximum FHA Loan Limit Is $424,000 in Most Areas

FHA will insure loans only up to a certain amount. In most parts of the US, this limit is $424,100. For people in expensive parts of the country, the limit can be higher; you should check with your FHA-approved lender to see what the maximum home value is for your area.

If you want to buy a home that is more than the maximum FHA loan amount for your region, you may have to apply for a conventional loan.

#7 Mortgage Insurance Is Part of Your Loan Payment

A down side of the FHA program is that you must pay mortgage insurance. This program is used so that the lender is reimbursed if you default on the mortgage.

FHA rules changed a few years ago so that most FHA lien holders have to pay for mortgage insurance for the entire life of the loan. But a secret that many don’t know is this: If you put down at least 10% on your FHA loan, mortgage insurance can be cancelled after 11 years.

If you are required to pay for PMI for the life of the loan, you probably will want to refinance out of your FHA mortgage eventually.

#8 Assets and Reserves Not Required

FHA is most interested in your income and your credit score. It is not a requirement generally to have several months of mortgage payments in reserve. Nor do you need to have a large amount of assets.

#9 203k Loans Available

A big plus with FHA financing is that you can also get a home improvement loan with your FHA home mortgage, called an FHA 203k loan. This allows the buyer to get a low-interest FHA mortgage to fund certain home improvement costs.

The FHA loan program is fantastic for millions of Americans who have average income and poor to average credit. We recommend that you follow the tips, tricks and secrets listed above to ensure that you can qualify for your home loan.

Find Out Why so many First Time Home Buyers look to FHA for easy home financing.

Find Out Why so many First Time Home Buyers look to FHA for easy home financing.

How Does FHA Mortgage Insurance Work?

FHA mortgages offer buyers with credit problems the possibility of owning a home with a low interest rate. However, all FHA mortgages require FHA mortgage insurance. It is a good idea to understand how FHA mortgage insurance works before you get FHA financing.

FHA mortgage insurance protects the mortgage lender from a large financial loss if you default on your mortgage. Without the guarantee of FHA insurance, few mortgage lenders would be willing to give a home loan to a person with lower incomes and credit scores.

FHA insurance is a cost to the home buyer, but it is important to remember that this cost has huge benefits: It allows home buyers with less financial strength to get a mortgage with a low rate and a low-down payment, in many cases.

FHA mortgage insurance features two parts. The first is upfront mortgage insurance. It may be financed or paid out of pocket. It is a yearly premium that is based upon the size of the loan.

The upfront mortgage insurance rate is 1.75% of the base loan amount. The other is a monthly mortgage insurance amount, which is usually .80% of the loan amount. The annual premium is broken into 12 payments each year and added to your monthly payment.

In the News: HUD Secretary, Ben Carson reiterated this week that HUD is still considering reducing the FHA mortgage insurance premium but they need have been struggling getting their nominations through the U.S. Congress. We anticipate a MIP reduction in 2018.

According to the Department of Urban Development’s FHA Guidelines for MIP:

All Terms (> 15 years and < or = to 15 years /180 months):

LTV > 90%
Annual MIP will be collected until the end of the term, or 30-years, whichever occurs first.

LTV < or = 90%
Annual Mortgage Insurance Premium will be collected until the end of the loan term, or 11 years, whichever occurs first.

You also have to pay the 1.75% for any amount of FHA loan at all LTVs.

Canceling FHA Mortgage Insurance

Probably the major down side of FHA mortgages today is this: Loans that were opened after June 2013 may not have mortgage insurance removed for the most part. Even if you have more than 20% equity on the property, you still have to pay for mortgage insurance.

However, there is an exception. If you put down more than 10% on your FHA home loan opened after April 1, 2013, you can apply to have your mortgage insurance removed after 11 years. But for those who put down less than 10%, your mortgage insurance on FHA liens is permanent.

The good news is that you can refinance out of the FHA mortgage into a conventional loan without any mortgage insurance once you have 20% equity. FHA mortgages do not have prepayment penalties, so you may refinance at any time, as long as you have the credit score and income to qualify.

Because you cannot cancel your FHA mortgage insurance, some borrowers may wonder if an FHA loan is worth it. This varies upon the person and their finances, but FHA loans are often it, even if you were to keep the FHA loan with mortgage insurance for 30 years. This is because FHA mortgage loans are much easier to get approved for than conventional loans. You can get an FHA mortgage loan with a credit score as low as 500, and a 3.5% down payment with a 580-credit score.

It is true that with a conventional mortgage, you can drop PMI after 20% of equity is reached. But when you consider the cost of FHA mortgage insurance compared to that for a conventional mortgage, plus putting down only 3.5% for FHA mortgage financing, the latter often makes financial sense.

However, another factor is your credit score. If you have a high credit score after paying on your FHA home mortgage for years, it may make a lot of sense to refinance out of the loan and get into a conventional loan. This is very likely the case if you only put 3.5% down on the FHA mortgage and must pay for mortgage insurance for the entire loan term. Why do that if you have a high credit score and can refinance into a conventional loan easily?

Other Benefits of FHA Mortgage Financing

Many people get hung up on paying for mortgage insurance, but we would argue that many people greatly benefit from getting approved for fixed FHA mortgage rates. Even if you have to pay for mortgage insurance, you still are enjoying many other benefits. Let’s consider them:

  • You are not renting anymore: This is the biggest benefit! Why should you pay for your landlord’s mortgage for years while trying to get your credit score high enough to get a conventional mortgage? Getting an FHA mortgage is possible with a credit score in the 500’s. This means you can often get into a home years faster.
  • Today’s FHA mortgage rates are low: The government guarantee of the loan means you can get a very low interest rate that may be lower than conventional rates. Only VA loans carry a potentially lower rate.
  • Your mortgage insurance gets you into a home: Paying that mortgage insurance means you get to buy a home. This is a big benefit!
  • Low down payments: FHA’s 3.5% down payment is nearly the lowest down payment available on the market today. There are some conventional loans that have a 3% down payment now, but you need a higher credit score than with an FHA mortgage. VA financing still guarantees no money down home loans. but you must be affiliated with the military.

Takeaways on FHA Mortgage Products

All good things in life have a down side. With the very good FHA option, the only major down side is a mortgage insurance premium. But remember, if you put down at least 10%, you can cancel your mortgage insurance after 11 years. If you are stuck with paying your FHA insurance for the life of the loan, you may have your score high enough on your credit report eventually to refinance out of it into a conventional loan.

References: What Is FHA Mortgage Insurance? (n.d.). Retrieved from https://www.lendingtree.com/glossary/what-is-fha-mortgage-insurance , and https://www.hud.gov/program_offices/housing/fhahistory ,FHA MIP Cancel. (n.d.). Retrieved from https://themortgagereports.com/7570/fha-mip-cancel , & LA Loan Limits retrieved from https://entp.hud.gov/idapp/html/hicost1.cfm   

About Bryan Dornan

With over 20 years in the mortgage industry, Bryan Dornan has started several companies, such as the Lead Planet, Mortgage Lenders Plus and the Refi Guide. Mr. Dornan has written hundreds of finance related articles in an effort to promote home-ownership to consumers across the United States.