FHA mortgage rates are often lower than rates from Fannie Mae and Freddie Mac. That’s because the mortgage giants’ best rates are available only to top-drawer applicants – people financing their primary residences who have FICO scores of at least 740 and at a down payment (or home equity) of at least 25 percent. Everyone else is subject to risk-based pricing adjustments (LLPAs), which can be substantial. FHA does not add risk-based adjustments.
What Is It?
FHA mortgages were created back in the 1930s to increase homeownership in the US. They were designed to help people overcome one of the biggest obstacles to buying a home – the 20 percent down payment. You can get an FHA mortgage with just 3.5 percent down as long as you have a credit score of 580 or better. FHA doesn’t actually loan the money; it guarantees the mortgage, making it less risky for the lender and cheaper for the borrower. FHA mortgage borrowers can choose among fixed, adjustable and hybrid ARM products.
What’s Great About It?
The FHA mortgage requires just 3.5 percent down if your credit score is 580 or better and 10 percent down if your score lies between 500 and 579. FHA underwriting is more flexible than that of conventional (non-government) mortgage lenders – debt-to-income ratios can be higher, non-traditional credit is considered and non-occupant co-borrowers are allowed. FHA mortgages are assumable, and you can refinance your FHA home loan into a new FHA mortgage without an appraisal. With an FHA mortgage, you can also build a home from the ground up or buy and fix up a property.
FHA has no risk-based pricing adjustments. The table below shows how this can save you money – in addition, many mortgage insurers won’t consider applicants with FICO scores below 600 – FHA might be the only option for those folks.
What’s Not Great About It?
FHA mortgages require an upfront mortgage insurance premium plus monthly mortgage insurance – no matter how big your down payment is. This can make an FHA mortgage more expensive than a conventional loan for some applicants. The chart below compares an FHA and conventional loan for a borrower with a 750 FICO score and a 10 percent down payment:
FHA appraisal requirements are more stringent than those of most lenders. FHA limits the amount you can borrow – an amount sufficient to buy a moderately-priced home in your area, but not a luxurious one. Finally, FHA loans are available only for primary residences – you can’t purchase a rental or vacation home with an FHA mortgage.
Who Is it For?
FHA home loans are NOT for people with substantial down payments and high credit scores – conventional loans represent a better deal for those applicants. FHA mortgages are for people with smaller down payments who wish to purchase a low- to moderately-priced house. FHA borrowers needn’t be first-time home buyers.
How Do You Get One?
FHA mortgages are sold by banks, credit unions, mortgage brokers, mortgage companies, savings and loans and other institutions. Look for this seal when you shop for a mortgage:
When shopping for a mortgage with less than 20 percent down, get quotes from lenders approved to do both FHA and conventional financing. Ask them to provide quotes for both programs -- this will help you find your best deal.