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Lowering Your Mortgage Payment in 2017 - Quicken Loans Zing Blog

The Federal Housing Administration (FHA) doesn’t make or guarantee loans, but it’s been insuring home loans since 1934. FHA loans offer a low down payment option with less stringent qualification requirements than a conventional loan.

We’ll go over why an FHA loan could be right for you if you’re looking to buy or refinance a home.

Why Is an FHA Loan a Good Option for Single or First-Time Homebuyers?

First-time and single homebuyers should explore FHA loan options for several reasons:

  • It’ll be easier to qualify for an FHA home mortgage because your loan will be insured by the government, making your application more attractive to lenders.
  • An FHA loan often costs less than a conventional mortgage and is more forgiving if you have issues with credit and payments.

To go over these advantages in greater detail, let’s take a look at a couple of key numbers.

Low Down Payment

FHA home loans don’t require a large down payment at closing time, which is a huge plus for first-time home buyers or a person seeking to buy a home on a single income. FHA clients can get financing with a loan-to-value (LTV) ratio of up to 96.5%. This means you’d have the ability to get a new home with as little as 3.5% down.

Yet another advantage of FHA loans for single or first-time buyers is that FHA mortgage terms may allow you to wrap closing costs into your mortgage. Because typical closing costs for FHA home loans are around 2% or 3% of the total mortgage, this option can allow you to get a loan that would otherwise be cost prohibitive if you don’t have stacks of extra cash at your disposal.

Credit Advantages

There are several advantages to FHA mortgages, particularly if you’re a lower- to middle-income buyer or you have experienced financial difficulties in the past. It’s important to note that the following guidelines apply to loans originated by Quicken Loans. Other lenders may have different requirements.

Qualify with Less-Than-Perfect FICO®

Clients who are otherwise well-qualified may be able to get a loan with a FICO score of as low as 580. This may enable them to get a mortgage even if they’re trying to rebuild their credit after past mistakes.

Higher Debt-to-Income Ratios Allowed

If you have a credit score in the mid-to-high 600 range, your allowable debt-to-income (DTI) ratio is higher on an FHA loan than the DTI ratio requirements on conventional loans. This means that if your debt is relatively high compared to your income, you may still qualify for an FHA loan.

Credit Blemishes

If you declared bankruptcy, you may be able to get an FHA loan a year or two from the date of your bankruptcy discharge or dismissal, as long as you’ve maintained good credit since your debts were discharged. The length of the waiting period depends on the type of bankruptcy filed.

Furthermore, if you foreclosed on a former home and have kept your credit in great shape since the foreclosure, you can apply for an FHA loan three years following the final date of your foreclosure.

How Could FHA Cash-Out Refinancing Options Help Me?

If you know you’ll soon need cash for college tuition or major home improvements, then an FHA cash-out refinancing option may be just what you need.

You may be able to get a lower interest rate than traditional home equity financing. An FHA refinancing loan offers amounts up to 80% of the appraised value.

Costs Associated with FHA Loans

Another appealing feature of FHA loans is that their mortgage rates and terms are competitive with conventional mortgages. Interest rates on FHA loans generally fall within .125% of rates on conventional loans.

Also, with an FHA loan, you have the option of having the upfront mortgage insurance premium rolled into the loan, meaning the 1.75% of the loan amount that would normally be paid at closing is added on to the loan balance to be paid off over time.

There is a monthly mortgage insurance charge. The amount of this depends on the size of your down payment.

Are There Any Special Requirements or Limits on FHA Mortgages?

Another consideration is the limit on the amount of money you can borrow with an FHA loan. Although the upper limit for most conforming loans is $484,350 ($726,525 in Alaska and Hawaii), FHA loan limits are set on the basis of your county and are often lower than these amounts.

Because FHA home loans also have requirements for debt-to-income ratios, maximum loan amounts, and other details, it’s important to ask your lender for help when deciding which mortgage is right for you.