What is an FHA Loan?
Launched in 1934 to help boost the housing market, the Federal Housing Administration (FHA) loan is still pretty much the same today. It’s a government-backed loan that allows people to buy a moderately priced home with a down payment as low as 3.5 percent. The partnership between the FHA and HUD has helped many people since its inception, insuring over 34 million home mortgages and 47,205 multifamily project mortgages. FHA currently has 4.8 million insured single family mortgages and 13,000 insured multifamily projects in its portfolio. In the 80 years since the FHA was created, much has changed and Americans are now arguably the best housed people in the world.
The government doesn’t actually lend the money, but it does insure the mortgages. That way, if the borrower can’t repay the loan, the FHA insurance reimburses the lender. This allows mortgage lenders to offer loans to less affluent applicants who might otherwise be denied.
- Get up to five mortgage offers from competing lenders in minutes - for free!
- Find Out if an FHA Mortgage Is Right for You
- Already know you want an FHA loan? Let’s Fast Track it!
Top 5 Reasons to Get an FHA Loan
- Credit Score
- A credit score is a number generated by a statistical system used to rate the credit of an applicants according to various characteristics relating to... <a href='/glossary/what-is-credit-score' title='See the full definition of Credit Score'>read more</a>
- FHA Loan
- A loan insured by the Federal Housing Administration open to all qualified home purchasers. While there are limits to the size of FHA loans, they are... <a href='/glossary/what-is-fha-loan' title='See the full definition of FHA Loan'>read more</a>
- FHA Mortgage Insurance
- Requires a small fee (up to 3 percent of the loan amount) paid at closing or a portion of this fee added to each monthly payment of an FHA loan to... <a href='/glossary/what-is-fha-mortgage-insurance' title='See the full definition of FHA Mortgage Insurance'>read more</a>
- Conversion Option
- A conversion option allows you to convert an ARM to a fixed rate mortgage. You will likely pay a higher rate or more points to have this option. <a href='/glossary/what-is-conversion-option' title='See the full definition of Conversion Option'>read more</a>
Frequently Asked Questions›
- What are the 5 basic steps to refinancing?
1. Determine if you should refinance
2. Find a lender
3. Choose a program
4. Apply here
5. Lock in your rate
- When does it pay to refinance a mortgage?
Any time you can get a no-cost refi with a lower interest rate, go for it – you have no break-even period, so the savings go straight to your bottom line. You can invest it, pay down your debts or accelerate your mortgage payoff.
- Should I refinance to an FHA mortgage?
You don’t need to have an FHA mortgage to refinance with FHA. And the fact that you can refi up to 97.5 percent of your home’s current value is a compelling reason to consider this option. For those with credit scores under 740 or loan-to-values above 80 percent, an FHA refi may be cheaper than Fannie Mae and Freddie Mac’s risk-based surcharges. But FHA also has its costs.
- How does cash-out refinancing work?
Cash-out refinancing is based on your home equity, which is the part of the home that you actually own. For example, if you have a home worth $250,000, and you owe $200,000 on the mortgage, you have $50,000 worth of equity in the home. If you refi the loan, that $50,000 is available for you to use (depending on your lender’s rules).
- When do rising rates may make refinancing ARMs riskier?
Before you decide to refinance your loan, review your current ARM with your loan officer. Find out how much your interest rate and payment could increase and when each adjustment will occur. How comfortable--or uncomfortable--would you be if the worst-case scenario for your ARM came true? If that scenario makes you queasy, refinancing could be a smart way to protect yourself from that risk.
- What are the top reasons to consider refinancing an ARM?
1. Your ARM is about to reset at a higher interest rate 2. You believe interest rates are going up long-term 3. You want the stability of a fixed rate 4. You want to refinance to another ARM 5. You’re staying put for a while 6. You’ve got higher-interest rate debt to consolidate 7. You want to cash out some of your home equity.
- Is it time to refinance your ARM?
As a rule of thumb, it’s worth considering a refinance if your new interest rate will be around 1.5 to 2 percent lower than your current rate. (Otherwise, fees may eat up any potential savings.) Compare your current rate with the posted rates offered by other lenders, but be sure to ask about the index and margin -- if they are different from those of your existing ARM, you may be comparing apples and oranges.
- How does the VA IRRRL Program assist veteran homeowners?
If you’re a qualified homeowner with a VA mortgage, you can refinance without worrying about your home's value or your credit rating. The U.S. Department of Veterans Affairs (VA) offers their Interest Rate Reduction Refinance (IRRR) loan to eligible borrowers who want to replace their existing VA home loans with new VA mortgages.
- How does refinancing a reverse mortgage work?
A reverse mortgage refi allows you to improve on your loan’s rates or terms with a lower interest rate. You can also replace an ARM rate with a fixed rate. This can be useful for other reasons as well, including adding a spouse or partner to the loan, borrowing additional funds or allowing heirs to pay off your reverse mortgage.
- What is cash-out mortgage refinancing?
Borrowers who refi their mortgage often want to convert some of their equity in their home into cash. If you take out cash when you refinance, your new loan will be bigger than the loan you want to replace. The difference between the current pay-off amount and the new balance is paid to you in cash.
- Can cash-out refinancing save you money?
Before refinancing for cash-out, make sure it's a good idea. Mortgage fees for cash-out refi's are higher than those of ordinary rate-and-term. If you can’t significantly lower your rate, then that may not be the best way to get your cash.
- How do you compare a cash-out refi to a home equity loan?
It depends on several factors – how the loan will be used, if the homeowner can improve the terms of their existing mortgage and calculating blended rates and refinance rates. Ultimately, home equity lines can often be set up for free, and home equity loans cost much less to set up than rate-and-term or cash-out refinances. Unless the homeowner can get refi offers that are significantly better than the existing home loan, taking a second mortgage (either home equity loan or line of credit) is a smarter choice.
- Should you refinance your ARM before it resets?
Of course, no one can predict for certain where interest rates will be headed next month, let alone four years from now. Rates may rise like in the example above, or they may decline, in which case you may see your ARM rate stay the same or even decline. Remember, too, that refinancing carries upfront costs that eat into your overall savings. In general, the longer you are planning to stay in your home, the more sense it makes to do it now. To help you determine what your new monthly payments are likely to be when your ARM resets, use the LendingTree adjustable rate mortgage payment calculator.
- When does using cash-out refinancing in order to fund major home improvements make sense?
It's easy for life's events to get ahead of your home repair plans and budget. A cash out refinance can help you update your home and may cost less than financing provided by contractors and home improvement suppliers and vendors. When making home improvements by choice rather than in an emergency it's important to consider which types of improvements can add the most value to your home.
- When is cash-out refinancing a good choice to pay off debt?
The key to using a cash-out refi is to be sure that you curtail your spending. If you use this strategy, but go back to your old spending habits, then you will have made a mistake. Not only will you have increased your mortgage, but you will have high interest credit card debt again.
- Should you use cash-out refinancing?
If you have high interest debt that you want to pay off and you are able to rein in your spending, the answer may be yes. You may be able to use cash-out refinancing to get a much lower interest mortgage with a larger principal, where the difference is enough to pay off that credit card debt. Used wisely, that can be a smart move.
- How can refinancing an ARM protect you from rising interest rates?
You can’t control interest rates. But you can protect yourself when rates are on the rise by refinancing your adjustable rate mortgage (ARM). Consider a Fixed-rate mortgage, a hybrid ARM or an ARM with a more stable index or more favorable caps.
- What is HARP and how can it help you?
HARP is the Home Affordable Refinance Program and it can allow people get some extra mileage out of lower interest rates by refinancing into a shorter mortgage.
Recent FHA Loan Articles
Recommended FHA Loan Articles