What to Know about Your FHA Mortgage Insurance
Graham & Kelly Levine May 22, 2014
With so many people using FHA loans to buy homes in Riverside, we get a lot of questions about the program, and one of the hot buttons is always the FHA mortgage insurance. If you have questions about the FHA program, or the mortgage insurance that acompanies it- this article is a good place to start!
An FHA mortgage is a loan insured by the Federal Housing Administration. The FHA, an agency of the U.S. Department of Housing and Urban Development, insures loans so that lenders will offer appealing rates to borrowers at a lower down payment. Typically, an FHA loan requires a down payment of just 3.5 percent and allows sellers and lenders to offer special incentives. In return, FHA-approved lenders may charge a higher interest rate, so borrowers should shop for the best rate among FHA-approved lenders. Your payment includes a premium amount to pay for the mortgage insurance the FHA provides.
Result of Premium Hikes
Many of the mortgages defaulted on during the housing collapse were FHA insured homes. In response, the FHA began raising premium rates and fees in 2010. Now at their highest to date, premium rates and fees were raised at least five times since then. This resulted in borrowers paying roughly $200 more per month in out-of-pocket expenses for home ownership on a $300,000 home. Upfront premiums are higher too, according to Robert Freedman at the National Association of Realtors. The result is a reduction by 90 percent in mortgage originations among borrowers in the 620 to 680 credit score range, and among moderate-income households simply because they cannot afford the additional $2,400 in annual payments.
Is an FHA Loan Still a Good Deal?
If you dream of home-ownership but cannot quite save up the 20 percent needed for a conventional loan, an FHA loan may still work for you. Just know that your payments will be higher than in the past. Qualifying is more stringent too, since lenders my baulk at credit scores lower than 620 even though the FHA only requires a score of 580 to meet its 3.5-percent down payment option. As a potential aid to borrowers, the upfront premium may be rolled into the loan, spreading that cost out over time.
Ways to Reduce Payments
The annual premium varies according to the size of down payment, or if you are refinancing- by the amount of equity you have in your home. If your down payment is at least five percent, you may qualify for a lower premium. Additionally, utilizing a graduated payment loan or adjustable rate loan may result in lower initial payments. The best way to reduce payments, however, is by making a larger down payment. The FHA allows portions of the down payment to come from family gifts as well as from personal savings, so if your family is on board, you could get a lower rate.
Qualify for a Better Loan
More than anything else, borrowers should consider avoiding these mistakes when looking to qualify for an FHA loan. Do not make large purchases on credit before applying for your loan. Your debt-to-income ratio weighs heavily in your ability to qualify for a loan. Work on your credit score. The higher your credit score, the better your chances. Be careful and deliberate in how you use credit, make payments and pay down existing loans. Avoid overbuying. Your first home does not have to be your dream home. Consider it a starting point on a lifelong journey to the right home at the right time.
If you are considering using an FHA loan to purchase your Riverside home, we would be happy to put you in touch with an FHA approved lender, and help you through the process of purchasing a home. Even if you just have questions about buying, give us a call! We are always happy to answer any questions you may have! We specialize in helping you find the right Riverside home for your situation. Call us today to get started!
For more information on Riverside real estate, the housing market, and homes for sale- contact Graham and The Home Team at (951)534-9296, or email us.