FHA Loan Basics
What is an FHA loan?
An FHA loan is a government-backed mortgage loan insured by the Federal Housing Administration (FHA). These loans are designed to assist borrowers with less-than-perfect credit or limited credit history, as well as low to moderate income, purchase a home.
Compared to conventional mortgage loans, FHA loans offer more flexible qualifying criteria making it easier to turn your homebuying dreams into reality. Continue reading to better understand how you can take advantage of this affordable loan option!
How do I qualify for an FHA loan?
Concerned about saving for a large down payment? Worried about your credit history? When it comes to FHA loans, there is no need to worry that your past may hold you back from an exciting homeownership future.
For FHA loans, some of the basic qualifications include:
- Flexible credit qualifications: The minimum credit score is 500. Past credit struggles don’t have to hold you back from experiencing and enjoying homeownership!
- Manageable debt: A debt-to-income ratio (DTI) less than 43% is typically required.
- Down payment funds: Homebuyers can purchase a home with as little as 3.5% down which is significantly lower than what is typically offered by conventional lenders.
- Steady employment and income: Stable income and employment history, including supporting documentation like tax returns, bank statements, and pay stubs.
- FHA-approved property: The home you purchase must meet FHA standards and be your primary residence.
- Required mortgage insurance premium (MIP): Much like private mortgage insurance (PMI) for conventional mortgage loans, FHA loans require an upfront and annual MIP to protect the lender.
What are the advantages of an FHA mortgage loan?
Key benefits of an FHA mortgage include:
- Lower down payment options: For credit scores between 500-579, you may qualify for a 10% minimum down payment. For credit scores of 580 or higher, you may qualify for a 3.5% minimum down payment. Lower down payment options help remove some financial stress from the homebuying process!
- Competitive rates: Since the loan is backed by the government, lenders tend to offer lower interest rates.
- Higher debt-to-income ratio (DTI) eligibility: Many lenders require a debt-to-income ratio of 43% or less, but some will go up to 50%.
It is easy to see why FHA loans are a popular, affordable choice among first-time homebuyers. Additionally, it allows those who have previously faced credit challenges a great opportunity to re-enter the housing market. Call RoundPoint today to review your eligibility!
Adjustable-Rate Mortgages (ARM)
What is an adjustable-rate mortgage (ARM)?
An adjustable-rate mortgage (ARM) is a mortgage loan with an interest rate that changes over time. There is an initial fixed-rate period, followed by an adjustment period where the interest rate adjusts periodically.
Since ARM loans typically begin with a lower interest rate compared to their fixed-rate counterpart, they are an excellent option for homebuyers that value short-term savings and increased flexibility. Let RoundPoint help you understand the benefits of adjustable-rate mortgages and how they can strategically fit into your financial goals.
What are the benefits of an adjustable-rate mortgage (ARM)?
Key advantages of an adjustable-rate mortgage (ARM) include:
- Lower initial interest rate: Compared to fixed-rate mortgages, the rate during the initial period is often significantly lower.
- Potential for rate drops: Unlike fixed-rate loans, ARM loans can adjust downward. If an interest rate drops, your monthly payment could decrease!
- Built-in rate adjustment limits: No need to worry about rising rates – most ARM loans include rate caps that limit how much your rate can increase, not only during each adjustment period but over the life of the loan.
The lower upfront costs and flexibility makes adjustable-rate mortgages great options for first-time homebuyers, investors, and those looking to purchase a second home.
Fixed-Rate Mortgages
What is a fixed-rate mortgage?
A fixed-rate mortgage is a mortgage loan with an interest rate that remains the same throughout the entire loan term. Fixed-rate mortgages have terms of 15, 20, or 30 years (30-year terms are the most common).
Since your monthly principal and interest amount will never change, a fixed-rate mortgage makes it even easier to plan for your future. Call our Loan Officers to discuss the stability of a fixed-rate mortgage!
What are the benefits of a fixed-rate mortgage?
- Predictable payments: Your monthly principal and interest amount stays the same month after month, for the life of the loan, making long-term budgeting easier.
- Protection from rising rates: If interest rates rise in the future, you will have peace of mind knowing you locked into your rate at the time of signing.
- Savings and equity growth: Consistent payments contribute to steady equity growth!
Fixed-rate mortgages are an excellent choice for homebuyers seeking long-term homeownership stability. At RoundPoint, we look forward to helping you secure the best fixed-rate mortgage for a worry-free loan structure!
Comparing Your Rates & Terms
Fixed Rate vs. Adjustable Rate
Fixed Rate
- Rate remains the same for the entire loan term
- Monthly principal and interest amount remains the same for the entire loan term
- Ideal for homebuyers who plan on staying in their home for a longer period
Adjustable Rate
- Rate remains the same for an initial period (first 3-10 years), then fluctuates for the remainder of the loan. The rate during the initial period is often lower than that of a fixed-rate loan
- Monthly payment changes throughout the adjustment period based on the market
- Ideal for homebuyers who plan on selling or refinancing, or who are comfortable with the eventual payment fluctuations
30-Year Fixed-Rate Mortgage vs. 15-Year Fixed-Rate Mortgage
Deciding between two popular loan term lengths is about a lot more than interest rate and payment. It is important to consider your current financial situation as well as your future goals. Talk with one of our Loan Officers to ensure you select the best mortgage term to set yourself up for success!
A 15-year fixed-rate mortgage will result in a higher mortgage payment amount compared to a 30-year fixed-rate mortgage; however, the 15-year fixed-rate mortgage option qualifies borrowers for a lower interest rate.
| Mortgage Term | 30 Year | 15 Year |
|---|---|---|
| Monthly Payment | $1,886 | $2,724 |
| Total Cost of Interest | $345,592 | $158,245 |
| Total Cost of Mortgage | $678,092 | $490,745 |
| Difference | $187,347 | |
Mortgage Insurance Premium (MIP)
Is mortgage insurance premium (MIP) required on all FHA loans?
MIP is required on all FHA loans, however, that is why FHA is able to offer such flexible credit requirements, low down payment options, and competitive interest rates. There is an upfront mortgage insurance premium that is paid at closing, and then a recurring fee that is paid monthly and lumped into your mortgage bill. MIP cannot be canceled, but there are options for potential removal in the future.
The addition of MIP to your monthly mortgage bill is often considered a valuable and helpful alternative to paying more money upfront. Still have questions about how MIP may impact you? Speak with one of our Loan Officers to review your options and determine how we can help reduce your long-term expenses.
Fees & Costs
What fees and costs are associated with mortgages?
Whether you are buying a new home or refinancing an existing mortgage, you may be surprised by the fees and costs involved. Some of these charges can significantly impact your monthly payment amount and the total cost of the loan, so it is important to understand what you are paying for and why.
Let’s look at some common fees and costs associated with a mortgage:
- Origination fee: Typically anywhere from $0-$995, this fee is charged by lenders for processing your loan.
- Appraisal fee: Appraisal fees, ranging from $0-$2000, cover the cost of a professional property appraisal.
- Credit report fee: This fee is paid to pull your credit report.
- Escrow costs: These costs are related to property taxes and insurance payments.
- Recording fees: Local government requires payment to register your mortgage. This cost generally ranges from $0-$500.
How can I lower my mortgage costs and fees?
While many costs are considered standard, some are negotiable or can be avoided completely. Here are a few strategies that may reduce or eliminate your costs:
- Compare lenders: Fees are not the same for all mortgage lenders. Compare loan estimates from multiple lenders to determine the most competitive option.
- Credit score: Improving your credit score may qualify you for lower interest rates or overall fees.
- Ask about waivers and discounts: Based on your credit score or loan type, you may be eligible for fee reductions or waivers. It never hurts to ask!
At RoundPoint, we believe in transparency and affordability. Let us help you feel empowered and prepared when making financial decisions during your homeownership journey!
Mortgage Loan Types At a Glance
| Type | Conventional | FHA | Jumbo |
| Minimum Credit Score | 620 | 500 | 700 |
| Terms | 15-30 Years | 15-30 Years | 15-30 Years |
| Minimum Down Payment | 3-20% | 3.5-20% | 5-30% |
| Maximum Debt-to-Income (DTI) Ratio | 50% | 43% | 43% |
| Fixed or ARM? | Fixed & ARM available | Fixed & ARM available | Fixed & ARM available |
| Best For | Homebuyers with good credit and the ability to make a larger down payment. | Homebuyers with lower or limited credit, first-time homebuyers, and/or those with less funds available for a down payment. | Homebuyers with stronger credit looking to purchase a more expensive primary residence, second home, or investment property, as well as the ability to make a significant down payment. |