FHA Loans: What You Need to Know in 2022
What is FHA Mortgage Insurance and How Much Does It Cost?
An FHA loan is a type of mortgage insured by the Federal Housing Administration (FHA). It allows borrowers with low credit scores to buy a home with a down payment as low as 3.5%. FHA loan guidelines are more lenient than conventional loans, giving borrowers with spotty credit histories and little cash saved for a down payment a shot at homeownership.
Shop around. Your best bet for getting the lowest FHA interest rates is to compare the loan estimates of at least three to five different FHA-approved lenders. Compare each lender’s closing costs, too (refinance closing costs range from 2% to 6% depending on your loan amount). A lower rate with high costs may not be the best deal if you don’t have the extra cash to cover the fees.
Boost your credit scores. The higher your credit score, the lower your FHA interest rate will be. You can improve your credit score by paying bills on time and capping monthly credit charges to 30% of your account limits.
Ask the seller to buy discount points. One full discount point (also called a mortgage point) equals 1% of your loan amount, and paying points typically buys you a lower interest rate. You can ask the seller to pay up to 6% of the price of your home toward closing costs, including discount points, to get a lower FHA interest rate. One added bonus of paying discount points: You may be able to deduct the cost of the points when you file your taxes.
Avoid cash-out refinance transactions. If you take out a new FHA loan amount for more than you owe to pocket some extra cash, lenders may charge a higher interest rate to offset the risk you might have trouble making the higher payment in the future. An added drawback to FHA cash-out refinance loans: The higher loan amount usually means higher closing costs including higher FHA mortgage insurance premiums.
An annual percentage rate (APR) reflects other costs related to getting a mortgage, such as origination fees and discount points. However, the APR on FHA loans is often much higher than FHA interest rates because of the higher cost of FHA mortgage insurance, which covers the lender’s losses if a borrower can’t repay the loan.
FHA loans require two types of mortgage insurance to protect lenders against default. The first is an upfront mortgage insurance premium (UFMIP) of 1.75% paid in a one-time lump sum. The second is the mortgage insurance premium (MIP) ranging from 0.45% to 1.05%, which is an ongoing annual charge that becomes part of your monthly payment.
Yes. A variety of FHA adjustable-rate mortgages (ARMs) are available with introductory fixed-rate periods of one, three, five, seven or 10 years. Once the initial fixed-rate period ends, the loan will adjust, meaning your rate and payment could rise or fall for the remainder of the loan term.
No. You can choose a shorter loan term, such as a 15-year, fixed-rate mortgage. The rate is typically lower, and you’ll save thousands in interest charges over the life of the loan. An added bonus: You’ll pay less in annual mortgage insurance premiums.
FHA mortgage insurance is mandatory for the life of an FHA loan with a 3.5% down payment. With a 10% down payment, you’ll pay the premiums for 11 years. To get rid of these payments, you can refinance to a conventional mortgage.
Try a comparison rate site, or ask for a referral from a friend, family member or a real estate agent. You can look up FHA-approved lenders online with the U.S. Department of Housing and Urban Development’s Lender List Search tool.
Yes, which is why you should always compare at least three to five different FHA-approved lenders’ loan estimates before you decide which one is best for you.
FHA interest rates are typically lower than conventional loans, before adding FHA mortgage insurance to the equation. However, when you add the upfront and annual mortgage insurance premiums, the APRs may make them more expensive than a comparable conventional loan.
The table below gives you a glance at the minimum requirements for an FHA loan.
| Minimum FHA qualifying requirements | |
| Down payment |
|
| Credit score |
|
| DTI ratio |
|
| Occupancy |
|
| Income |
|
| Assets |
|