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Guide to Getting a Federal Housing Administration (FHA) Mortgage

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Not all homebuyers have the money to make a traditional 20% down payment. The perception that you need one is one of the main financial obstacles that can discourage people from pursuing homeownership.

In reality, there are several options for buyers who want to get a mortgage but can only pull together a small down payment. One of the best ones, particularly for first-time homebuyers, is an FHA loan.

This article offers you a guide to getting an FHA mortgage, including details on how to qualify and the costs to consider.

Understanding the FHA mortgage program

FHA mortgages are insured by the Federal Housing Administration (FHA), part of the U.S. Department of Housing and Urban Development. The program is a key way that people of moderate income can become homeowners. Nearly 83% of homeowners who borrowed an FHA loan in 2018 were first-time homebuyers, according to a report from HUD.

FHA mortgages are funded by FHA-approved lenders and then insured by the government. This backing protects lenders from loss if borrowers default. Because of this protection, lenders can be more lenient with their qualifying criteria and can accept a significantly lower down payment.

You can get approved for an FHA mortgage with as little as a 3.5% down payment and a credit score of 580. You may also qualify with a credit score as low as 500, though you’ll need to put down 10% instead.

On a $200,000 home, that comes out to a down payment of $7,000 to $20,000 when taking out an FHA loan, depending on your credit score.

Keep in mind you’ll also be responsible for closing costs, which typically cost 2% to 5% of a home’s purchase price. Closing costs are necessary to complete your transaction, and include services such as appraisals and home inspections. However, you may be able to negotiate to have some of these costs covered by the seller.

Is an FHA loan right for you?

FHA loans are particularly suited for several different types of homebuyers.

First-time homebuyers, who often have lower credit scores and smaller available down payments, tend to gravitate to FHA loans. Additionally, boomerang buyers — people who lost a home in the past due to a bankruptcy, foreclosure or short sale — might also benefit from an FHA loan.

Negative credit events such as foreclosure can drop credit scores by more than 100 points in many cases, and there’s typically a waiting period of three years before you’re eligible to buy a home again. Once that’s up, the lower credit score requirements of the FHA loan program could help you become a homeowner again.

Types of FHA mortgages

The FHA offers both 15- and 30-year mortgages, each with fixed rates or adjustable rates.

With a fixed-rate FHA mortgage, your interest rate is consistent through the loan term. You know what your principal and interest payment will be for the life of the mortgage. However, your overall monthly payment may increase or decrease slightly based on your homeowners insurance, mortgage insurance premium and property taxes.

Adjustable-rate FHA mortgages start out with a low and fixed interest rate during an introductory period of time, usually five years. Once the introductory period ends, the interest rate will adjust annually, which means your monthly mortgage payments may increase based on market conditions.

A unique situation where signing up for a low, adjustable-rate FHA mortgage could make sense is if you plan to sell or refinance the home before the introductory period ends and the interest rate changes. Otherwise, a fixed-rate FHA mortgage has predictable principal and interest payments and may be the better option.

FHA loan limits

The FHA imposes a limit on the amount of money that homebuyers are allowed to borrow each year. For 2019, the FHA loan limits for one-unit properties are $314,827 in most U.S. counties and $726,525 for high-cost areas. You can find your county’s loan limit information for one- to four-unit properties by using the FHA’s lookup tool.

Qualifying for an FHA loan

Besides the low down payment, an undeniable benefit of the FHA mortgage is the low credit score requirement. You may qualify for a 3.5% down payment with a credit score of 580 or higher. You can qualify with a minimum credit score of 500, but you’ll have to make at least a 10% down payment.

Your debt-to-income (DTI) ratio is another key metric lenders use when determining whether you can afford a mortgage. DTI measures the percentage of your gross monthly income that is used to repay debt. Lenders consider two DTI ratios when determining your eligibility — the front-end (housing debt) ratio and the back-end (total debt) ratio.

Your front-end ratio is the percentage of your income it would take to cover your total monthly mortgage payment. Lenders typically like to see a front-end ratio of no more than 31%.

Your back-end ratio illustrates the percentage of your income that covers your total monthly debts. Lenders prefer a back-end ratio of 43% or less, but may approve a higher ratio if you have compensating factors, such as a higher credit score or a larger down payment.

You’ll also need to have a steady income and proof of employment for the last two years. Additionally, the home you’re purchasing via FHA must also be your primary residence, at least for the first year.

FHA mortgage insurance

At first glance, an FHA mortgage probably seems like the ultimate hack to buying a home with minimal savings. The flip side to this is you must pay mortgage insurance premiums (MIP) in exchange for your lower down payment.

Remember, FHA-approved lenders offer mortgages that require less money down and flexible qualifying criteria because the Federal Housing Administration will cover the loss if you default on the loan. The government doesn’t do this for free.

FHA mortgage borrowers must “put money in the pot” to cover the cost of this backing through upfront and annual mortgage insurance premiums. The upfront insurance premium costs 1.75% of the loan amount and can be rolled into your mortgage balance.

The annual mortgage insurance premium is divided into 12 installments and paid monthly as part of your mortgage payment. The annual premium ranges from 0.45% to 1.05%, based on your loan term, loan amount and loan-to-value ratio (LTV).

Your LTV is a metric that compares your loan amount to your home’s value. It also represents the equity you have in the property. For example, putting 3.5% down means your LTV would be 96.5%. In other words, you have 3.5% equity in the home, and your loan is covering the remaining 96.5% of the home value.

Here’s the annual MIP on a 30-year FHA mortgage (for loans less than or equal to $625,500):

  • LTV over 95% (you initially have less than 5% equity in the home) – 0.85%
  • LTV under 95% (you initially have more than 5% equity in the home) – 0.8%

As you can see, starting off with a smaller down payment will cost you more in mortgage insurance premiums. Additionally, in most cases, you’ll pay annual MIP for the life of your loan.

However, if your LTV was less than or equal to 90% at time of origination — meaning you made a down payment of at least 10% — you can cancel MIP after 11 years.

FHA loans vs. conventional loans

Government-backed home mortgages like the FHA loan are special programs serving borrowers who might not qualify for a traditional mortgage.

Conventional mortgages are offered by lenders and banks and typically follow Fannie Mae and Freddie Mac’s mortgage standards. Fannie and Freddie are government-sponsored enterprises that buy loans from mortgage lenders and banks that fit their requirements.

The qualifying criteria bar for conforming loans is usually set higher. For instance, you typically need to have at least a 620 credit score to qualify for a fixed-rate conventional loan. However, credit score minimums vary by lender, but in any case, a score above 620 will be necessary for the most competitive interest rates.

A misconception about conventional mortgages is that borrowers must have 20% for a down payment to qualify. Mortgage lenders may accept less than 20% down for a conventional mortgage if you have a high credit score and pay their version of mortgage insurance premiums, which is called private mortgage insurance (PMI).

Similar to FHA mortgage insurance, PMI is a private insurance policy that protects the lender if you default. Be careful not to confuse the two types of insurance policies.

If you have PMI on a conventional mortgage, you’re able to request the removal of those insurance payments when you build up 20% equity in your home. On the other hand, the mortgage insurance premiums for most new FHA mortgages can’t be removed unless you refinance.

When to choose a conventional mortgage instead

Choosing an FHA loan can be a shortcut to homeownership if you don’t have much cash saved or the credit history to get approved for a conventional mortgage. Still, the convenience comes at a price that can follow you for the entire loan term.

Furthermore, putting a small sum down on a home means it will take you quite some time to build up equity. A small down payment can also increase your monthly payments and interest rate.

Homebuyers with a strong credit score should consider saving a bit more money and shopping for a conventional home loan first before thinking an FHA mortgage is the only answer to a limited down payment.

If you plan to put down at least 5% toward your home purchase and have a good or excellent credit score, it might make sense to borrow a conventional mortgage instead. A conventional home loan with PMI may not require the same upfront insurance payment as the FHA home loan, so you can find some savings there. Plus, you’re capable of getting rid of PMI without refinancing.

There are a few conventional mortgage programs that allow a 3% down payment, including Fannie Mae’s HomeReady program and Freddie Mac’s Home Possible program. These products also have cancellable mortgage insurance.

Shopping for an FHA loan

So, you’ve reviewed all the information and determined that an FHA loan is right for you. Once you’re ready to start the homebuying process, one of the most important things on your to-do list is shopping around.

Gather quotes from multiple FHA-approved lenders to find the most competitive rate. If you’re unfamiliar with the approved lenders in your area, you can use the HUD’s lender list search to locate them.

Comparison shopping for the best mortgage rate can save you thousands in interest over the life of your loan, according to research from LendingTree, which owns MagnifyMoney. Be sure you also compare the various other costs associated with borrowing a mortgage, including lender fees and title-related expenses.

Don’t rush to a decision. If you’re still not sure which mortgage type will be the most cost-effective for you, ask each lender you shop with to break down the costs for a comparison.

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Crissinda Ponder
Crissinda Ponder |

Crissinda Ponder is a writer at MagnifyMoney. You can email Crissinda here

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10 States with the Worst Property Tax Bills

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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When you’re calculating how much home you can afford, don’t forget to factor in property taxes.

This annual bill is one of the most important expenses tied to homeownership, but it might not always be top of mind. Property taxes are one of the primary ways your local government funds itself, and your city or county can even foreclose on your property if you don’t pay on time.

That means property taxes are vitally important to your mortgage lender as well — so much so that you probably have an escrow account set up to make sure your tax bill is covered on your behalf.

Property tax rates vary from state to state, and some places have jaw-dropping tax burdens — including several states in the Northeast region. Keep reading for a breakdown of the states with the largest average property taxes for homeowners.

A quick overview of property taxes

Property taxes are fees levied on privately-owned property such as real estate and vehicles, with the amount charged depending on the property’s value. Property taxes are generally the primary source of revenue for state and local governments, and support several government services including the local school district, public safety departments and road maintenance.

Each state has its own set of property tax guidelines; however, property taxes are calculated by taking a percentage of the property’s value, called the assessed value, and multiplying it by the local tax rate. The tax assessor is the person who determines each property owner’s tax bill.

If you still have a mortgage, you likely are paying a portion of your taxes each month as part of your mortgage payment, which goes straight into your escrow account. When your tax bill comes due, your mortgage lender pays it for you.

The 10 states with the highest property taxes

Annual homeowner tax bills across the U.S. range from an average of $684 in Alabama to $8,485 in New Jersey, according to an analysis from the National Association of Home Builders (NAHB). As mentioned previously, property taxes are based on a percentage of a home’s value, multiplied by the local tax rate, which can explain the wide variation in tax bills.

Take a look below at the 10 worst states for property taxes. We’ve highlighted the NAHB’s data on the average amount of taxes paid each year in these states, as well as the average effective property tax rate, which can be expressed either as a percentage of a home’s value or a dollar amount charged for every $1,000 of a home’s value.

We’ve also included the median home values in each state, according to data from the U.S. Census Bureau.

Map: Average property tax bills across the U.S.

Use the map below to check the average annual property tax bill in your state and how it stacks up against the others.

3 tips to lower your tax burden

You’re responsible for paying property taxes as a homeowner, no matter the amount. Fortunately, you might be able to lower your tax bill, which could also lower your monthly mortgage payment.

If you’re able to take action to reduce your property taxes, this can also lead to a slight reduction in your overall mortgage payment.

Consider these three tips to lower your property tax burden.

Apply for a homestead exemption

Check with your local tax authority about any available tax breaks you might qualify for, such as a homestead exemption, which reduces the taxable amount of your home’s value. For example, if your home is worth $250,000 and you receive a $50,000 exemption, your property tax bill would be based on a $200,000 value.

Appeal your assessment

If you believe your home has been overvalued by your local tax assessor, you have the option to appeal your assessment. Reach out to your local tax authority for information on how to file an appeal. The National Taxpayers Union Foundation also has a checklist to help you get started.

Deduct your property taxes

The rules have changed, but you might still qualify to deduct your property taxes on your tax return. Before the Tax Cuts and Jobs Act (TCJA) of 2017, taxpayers were able to deduct the full amount of the state and local taxes, including property taxes, they paid in a given year. Under the TCJA, there is now a $10,000 limit imposed on the deduction of state and local taxes.

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Crissinda Ponder
Crissinda Ponder |

Crissinda Ponder is a writer at MagnifyMoney. You can email Crissinda here

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PMI Explained: What It Is and Why You Should Have It

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

When you decide to purchase a home, there’s a laundry list of considerations you must keep in mind. Just for starters, you have to pick a location you’re comfortable committing to, find the perfect house and determine what you can afford.

That last calculation can be more difficult than it seems. You might have a good idea how much money you can use for a down payment. But have you considered how the amount you put down affects what you’ll need to pay for private mortgage insurance?

In this article, we will explain private mortgage insurance and why it’s necessary for many homebuyers.

What is private mortgage insurance?

Private mortgage insurance, commonly called PMI, is an insurance policy that protects your mortgage lender from loss, should you stop making payments on your mortgage. PMI is meant to shield your lender’s investment in your home, not yours.

Mortgage insurance should not be confused with homeowners insurance. Your homeowners insurance policy is meant to protect your home and personal belongings from damage or destruction. If, say, a storm knocks a tree down onto your house, you can likely submit a claim to be reimbursed for the expenses you incur to repair or replace your property.

Mortgage insurance works differently. You’re responsible for paying the policy, but you don’t benefit if there’s a claim.

However, you do benefit from mortgage insurance in general. PMI gives lenders confidence to approve mortgages for people with smaller down payments and lower credit scores, opening up access to homeownership to millions more people.

How PMI works

Most people don’t think too much about private mortgage insurance. It’s mandatory for certain types of loans, and lenders usually choose a private mortgage insurer and package it with your mortgage.

There are several PMI companies for them to choose from. Some of the most common insurers include Essent, Genworth, Mortgage Guaranty Insurance Corporation, National Mortgage Insurance and Radian, according to U.S. Mortgage Insurers.

Who must pay PMI?

Not all homebuyers are responsible for carrying a private mortgage insurance policy. Only borrowers with conventional mortgage who contribute less than a 20% down payment are required to pay for PMI.

Government-backed loans like FHA loans, VA loans and USDA loans have their own versions of insurance. Homeowners who put down more than 20% also are not required to pay private mortgage insurance.

How do you pay PMI?

In most cases, private mortgage insurance premiums are paid monthly and included in the monthly fee you send to your lender. PMI is counted as part of the escrow portion of your monthly mortgage payment.

The lender will then submit your PMI payments to the insurer on your behalf when they’re due, just as is the practice for homeowners insurance and property taxes.

However, there are different ways to cover PMI:

  • A monthly premium, which is added to your mortgage payment. This is the most common way to pay.
  • A one-time, upfront premium, which is paid at closing in a lump sum.
  • A split between an upfront and monthly premium.

You pay for PMI until you’ve built at least 20% equity in your home, at which point you can request that your lender cancel your PMI payments. Alternatively, you can wait for your PMI to automatically be removed when you reach 22% equity.

How much does PMI cost?

The cost of PMI is determined by your credit score and your loan-to-value ratio, which is calculated by dividing your mortgage amount by your home’s value. Generally speaking, PMI could cost you anywhere from $30 to $70 per month for every $100,000 you borrow, according to Freddie Mac.

Similar mortgage insurance programs

Private mortgage insurance is unique to conventional loans, which are backed by government-sponsored enterprises Fannie Mae and Freddie Mac.

A mortgage insurance premium, or MIP for short, is specific to mortgages backed by the Federal Housing Administration, which is overseen by the U.S. Department of Housing and Urban Development.

FHA loans require two types of MIP: annual and upfront. The upfront premium costs 1.75% of the loan amount and is paid at closing. The annual premium ranges from 0.45% to 1.05% of the loan amount — depending on the down payment amount and mortgage term — and is paid in 12 monthly installments each year.

MIP serves a purpose that is similar to that of PMI — protecting the lender if the borrower defaults on their mortgage. However, unlike PMI, mortgage insurance premiums are required for the life of an FHA loan in many cases. Below, we highlight the differences between private mortgage insurance and mortgage insurance premiums.

 PMIMIP
Cost$30 to $70 per every $100K borrowed.1.75% of the loan amount upfront; 0.45% to 1.05% of the loan amount annually.
Payment periodUntil you reach at least an 80% LTV ratio.Either the life of the loan or 11 years (if you put down at least 10% at closing).
Loan typeConventional loans.FHA loans.
Cancellation requirementsPay down your mortgage to an 80% LTV ratio and make a request with your lender.Make a 10% down payment or refinance into a conventional loan.

The benefits of PMI

Private mortgage insurance allows many prospective homebuyers the chance to buy a home much sooner than anticipated, because it applies to buyers who have small down payment amounts. Some conventional mortgage products allow a down payment as low as 3% of the loan amount.

PMI also isn’t just a one-size-fits-all type of cost — typically, the better your credit score, the less you pay.

Additionally, as previously mentioned, you have the ability to cancel your private mortgage insurance payments once you’ve accumulated 20% equity in your home.

How to cancel PMI

Although private mortgage insurance is an added cost and necessary for many buyers to reach their homeownership goals, it doesn’t mean you’re tied to those PMI payments forever. It’s also possible to skip the private mortgage insurance requirement altogether. Here are a few common ways to avoid or cancel PMI.

Request PMI cancellation from your lender

If you believe you’ve built up 20% equity in your home — from paying down your mortgage or experiencing a significant increase in your home’s value, or both — you can request that your mortgage lender remove PMI from your loan. You’ll need to meet several criteria for your request to be honored, according to the Consumer Financial Protection Bureau, which include:

  • Submitting your request in writing.
  • Maintaining a good payment history and being current on your payments.
  • Certifying that there are no other liens on your home, such as a second mortgage.
  • Paying for an updated appraisal to verify your home’s value.

If an appraisal verifies that you have reached 20% equity, the lender will cancel the PMI policy.

Refinance your mortgage

Consider refinancing your mortgage to drop PMI payments. A refinance could be an alternative to just simply requesting that your lender cancel PMI, as you not only have the chance to cut PMI from your monthly mortgage payments but also possibly lower your principal and interest payments and reduce your interest rate. Just be sure the benefits outweigh the costs of refinancing before you apply.

However, there’s a caveat: You’ll only be able to remove PMI from your refinanced mortgage if you have at least 20% equity at the time of your refinance. — otherwise, PMI will be factored into your new monthly mortgage payment amount.

Wait for automatic PMI termination

Mortgage lenders are required to remove PMI from your mortgage on the date your outstanding mortgage balance is anticipated to reach 78% of your home’s original value, according to the CFPB. You’ll need to be current on your monthly payments in order to qualify.

The bottom line

Having a mortgage requires more than simply repaying the principal and interest on the loan you borrow. There are many other costs involved, including property taxes, homeowners insurance and, in many cases, private mortgage insurance. While PMI doesn’t directly protect you, it does provide you the opportunity to more quickly enter the housing market.

Still, if you don’t desire to take on the added cost that PMI brings, the best way to avoid paying for it is waiting to buy a home until you have at least a 20% down payment at the ready. The downside to this choice is you run the risk of losing out on buying power if mortgage rates increase, as they are predicted to do.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Crissinda Ponder
Crissinda Ponder |

Crissinda Ponder is a writer at MagnifyMoney. You can email Crissinda here

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