Understanding what loan is best for you isn’t always as simple as it might seem. With so many different kinds of loans, many of us end up in situations that might not be in our financial favor.
Most of us just want to own a home, so when someone tells us they have a way of making that happen we don’t ask too many questions. The problem is once we have signed on the dotted line and that 30-year mortgage is already in place, we start to ask questions, and it’s already too late.
An FHA loan is a mortgage insured by the Federal Housing Administration. Borrowers with FHA loans pay for mortgage insurance, which protects the lender from a loss if we default on the loan. Because of that insurance, lenders can -- and do -- offer FHA loans at attractive interest rates and with less stringent and more flexible qualification requirements. The FHA is an agency within the U.S. Department of Housing and Urban Development.
To get a mortgage with a down payment as low as 3.5%, the borrower needs a credit score of 580 or higher. Those with credit scores between 500 and 579 must make down payments of at least 10%. People with credit scores under 500 generally are ineligible for FHA loans. The FHA will make allowances under certain circumstances for applicants who have what it calls "nontraditional credit history or insufficient credit" if they meet requirements. But you will have to ask your FHA lender or an FHA loan specialist if you qualify.
FHA borrowers can use their own savings to make the down payment. But other allowed sources of cash include a gift from a family member or a grant from a state or local government down-payment assistance program.
However, seeing as the FHA is not a lender, but rather an insurer, we need to get our loans through an FHA-approved lender (as opposed to directly from the FHA). Not all FHA-approved lenders offer the same interest rate and costs -- even on the same FHA loan.
With the FHA loan, you will have to pay two mortgage insurance premiums. The upfront premium is 1.75% of the loan amount -- $1,750 for a $100,000 loan. This is paid when you get your loan. It can be added into the total cost of the home purchase.
The second is called the annual premium, although it is paid monthly. It varies based on the length of the loan, the amount borrowed and the initial loan-to-value ratio, or LTV.
You also get FHA insurance, which isn’t intended to be an easy out for people who feel unhappy about their mortgage payments. But loan servicers can offer some help to us if we have an FHA-insured loan, have suffered a serious financial hardship and are struggling to make our payments. That relief might be a temporary period of forbearance, a loan modification that would lower the interest rate or extend the payback period, or a possible deferment of interest.
Just remember it’s all about finding the loan that fits you and your family best. At WLM Financial, our goal and my dream is to teach people how to get in the position to be financially free, and with a little bit of hard work and endurance you can get there.