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BancorpSouth Review: Checking, Savings, CD, Money Market and IRA Accounts

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.

Year Established1876
Total Assets$18.0B
LEARN MORE Bancorp South’s secure website

BancorpSouth was founded in 1876 in the back of a hardware store in tiny Verona, Miss. Now headquartered five miles up the road in Tupelo, this bank has approximately 280 locations across eight states: Alabama, Arkansas, Florida, Louisiana, Missouri, Mississippi, Tennessee and Texas. The bank holds total assets north of $17 billion.

BancorpSouth carries a wide range of financial products, such as credit cards, auto, boat and RV loans, home loans, and investment accounts. They also offer checking, savings, CD, money market and IRA accounts. We’ll focus on these accounts in this review.

In this review, we put BancorpSouth’s accounts to the test. BancorpSouth may offer different rates depending on what region you’re in. To keep things consistent, we always looked at rates in the 38803 zip code (in Tupelo, Miss.), because this is where BancorpSouth is headquartered.

Bancorp South’s Most Popular Accounts

APY

Account Type

Account Name

Compare Rates from Similar Accounts

0.15%

Savings

Bancorp South My Goal Savings

2.10%

American Express National Bank High Yield Savings Account

on American Express National Bank’s secure website

BancorpSouth’s checking account options

BancorpSouth My Way Checking

This entry-level checking account does not earn interest.
  • Minimum opening deposit: $50
  • Monthly account maintenance fee: $5 (waived if you meet specific requirements, detailed below)
  • ATM fee: No fee for using BancorpSouth ATMs. If you use an out-of-network ATM in the United States, you may be charged a fee by both BancorpSouth and the ATM’s owner. Call the bank to ask about current costs associated with out-of-network ATMs. If you use a foreign ATM, you’ll pay $2 per transaction, plus a 2% cross border fee.
  • ATM fee refund: None
  • Overdraft fee: $36 per item

This checking doesn’t earn interest, but it’s relatively easy to avoid monthly fees. You can avoid the above-referenced service charge by meeting one these requirements during the statement cycle:

  • $100 minimum daily balance, or
  • Five debit card purchase transactions, or
  • At least one direct deposit of $100 or more

The My Way Checking account also comes with access to BudgetWi$e, the bank’s free online budgeting tool.

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BancorpSouth Performance Checking

This account lets you earn higher interest rates if you have a relationship with the bank.
APYMinimum Balance to Earn APY
0.10%$30,000+
1.76%$0.01 - $30,000
  • Minimum opening deposit: $50
  • Monthly account maintenance fee: $10 (waived if you meet certain requirements, detailed below)
  • ATM fee: No fee for using BancorpSouth ATMs. If you use an out-of-network ATM in the United States, you may be charged a fee by both BancorpSouth and the ATM’s owner. Call the bank to ask about current fees associated with out-of-network ATMs. If you use a foreign ATM, you’ll pay $2 per transaction, plus a 2% cross-border fee.
  • ATM fee refund: The bank will refund their $2 ATM fee plus up to $2 in fees paid by the ATM owner for the first five non-BancorpSouth transactions if the account holder meets all three of the higher rate requirements listed below.
  • Overdraft fee: $36 per item

The standard interest rate for this checking account is pretty meager, but it may be easy for you to earn the bonus rate. The Bonus APY of 1.76% applies on balances of $30,000 or less if you meet these three requirements each statement period:

  • Must have at least one direct credit or debit, such as direct deposit or automatic bill payment
  • Must make at least 12 debit card purchase transactions
  • Must be enrolled to receive online statements

You’ll definitely want to make sure you meet the requirements to receive the bonus rate every month. Doing so will not only get you a higher APY, but you’ll also be able to avoid the $10 monthly service charge and get up to $10 in ATM fees refunded each month. You can also avoid the monthly service charge by maintaining a $1,000 minimum daily balance in your account.

The Performance Checking account also comes with access to BudgetWi$e, BancorpSouth’s free online budgeting tool.

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BancorpSouth Interest Plus Checking

This account lets you earn higher interest rates as you deposit more money in your account.
APY
Minimum Balance to Earn APY
0.10%$0.01 - $4,999.99
0.12%$5,000 - $9,999.99
0.15%$10,000 - $24,999.99
0.17%$25,000 - $49,999.99
0.20%$50,000 - $99,999.99
0.25%$100,000+
  • Minimum opening deposit: $1,000
  • Monthly account maintenance fee: $10 (waived if you maintain a $1,000 minimum daily balance)
  • ATM fee: No fee for using BancorpSouth ATMs. If you use an out-of-network ATM in the United States, you may be charged a fee by both BancorpSouth and the ATM’s owner. Call BancorpSouth to ask about current fees associated with out-of-network ATMs. If you use a foreign ATM, you’ll pay $2 per transaction, plus a 2% cross-border fee.
  • ATM fee refund: None
  • Overdraft fee: $36 per item

The interest rates available for this checking account aren’t exactly generous. The highest rates available on this account are quite a bit lower than the bonus rate available through the Performing Checking account. However, since the bonus rate is available only on balances up to $30,000, this account might be a better option if you maintain a higher balance in your checking account.

And there’s one more benefit that might be appealing to people who prefer paper statements with imaged checks. This service is free for Interest Plus Checking account holders, whereas some of BancorpSouth’s other checking account options charge a fee.

The Interest Plus Checking account also comes with access to BudgetWi$e, BancorpSouth’s free online budgeting tool.

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BancorpSouth Heritage Checking

This account gives seniors age 62 and older the ability to earn travel and bonus rewards.
APYMinimum Balance to Earn APY
0.10%$0.01
  • Minimum opening deposit: $50
  • Monthly account maintenance fee: $8 (waived if you maintain a $500 minimum daily balance)
  • ATM fee: No fee for using BancorpSouth ATMs. If you use an out-of-network ATM in the United States, you may be charged a fee by both BancorpSouth and the ATM’s owner. Call BancorpSouth to ask about current fees associated with out-of-network ATMs. If you use a foreign ATM, you’ll pay $2 per transaction, plus a 2% cross-border fee.
  • ATM fee refund: None
  • Overdraft fee: $36 per item

The interest rates available for this checking account are modest, but it offers some unique perks. Account holders receive:

  • One free box of checks per year
  • $100,000 common carrier Accidental Death and Dismemberment Insurance
  • A free Savers Club Book with discount offers at over 3,000 participating lodging properties, theme parks and car rental companies
  • The ability to receive discounts and earn cash rewards when they arrange travel through a third-party partner
  • Free copies of Sojourns magazine

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BancorpSouth Student Checking

This account doesn’t earn interest, but it makes free checking available to students age 24 and under with no minimum balance requirements.
  • Minimum opening deposit: $50
  • Monthly account maintenance fee: $0
  • ATM fee: No fee for using BancorpSouth ATMs. If you use an out-of-network ATM in the United States, you may be charged a fee by both BancorpSouth and the ATM’s owner. Call BancorpSouth to ask about current fees associated with out-of-network ATMs. If you use a foreign ATM, you’ll pay $2 per transaction, plus a 2% cross-border fee.
  • ATM fee refund: None
  • Overdraft fee: $36 per item

This checking account doesn’t earn interest, but with no minimum monthly balance requirements and no monthly maintenance fee, it’s an affordable option for college students. Plus, it comes with a few nice features. Account holders receive their first box of 25 checks printed at no charge and have the option to upgrade to checks with their college’s logo.

The Student Checking account is available for students through the age of 24. After age 24, the account will automatically be converted to another standard checking account.

The Student Checking account also comes with access to BudgetWi$e, BancorpSouth’s free online budgeting tool.

How to get BancorpSouth’s checking accounts

You’ll need to provide some basic personal information, such as your name, Social Security number, date of birth, address and driver’s license number. You’ll also need details for your current U.S. checking or savings account to fund your new account. If you don’t already have a U.S. checking or savings account, you’ll have to apply in person at a BancorpSouth location.

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How BancorpSouth’s checking accounts compare

This bank’s checking accounts offer modest interest rates compared with the best online checking accounts out there. Truly fee-free checking is only available to students, although it’s possible to avoid monthly service fees rather easily.

If you’re between the ages of 24 and 62 and don’t mind jumping through a few hoops to meet the requirements each month, you’ll earn a better rate with BancorpSouth’s Performance Checking than you will with their other accounts. However, you might be able to earn more by keeping less money in your checking and more in another interest-bearing account.

BancorpSouth’s savings account options

BancorpSouth My Goal Savings

A good beginner account focused on saving toward a goal.
APYMinimum Balance to Earn APY
0.15%$0.01
  • Minimum opening deposit: $100
  • Minimum balance to earn APY: $0.01
  • Monthly account maintenance fee: $5 (waived if you maintain a minimum balance of $100)
  • ATM fee: No fee for using BancorpSouth ATMs. If you use an out-of-network ATM in the United States, you may be charged a fee by both BancorpSouth and the ATM’s owner. Call BancorpSouth to ask about current fees associated with out-of-network ATMs. If you use a foreign ATM, you’ll pay $2 per transaction, plus a 2% cross-border fee.
  • ATM fee refund: None
  • Overdraft fee: $36 per item

This is BancorpSouth’s basic savings account, and an option if you’re looking for a simple, no-frills place to store your cash. This account does have a monthly fee, but you can easily avoid it by keeping a minimum of $100 in your account.

Per Regulation D, you’re allowed up to six certain withdrawals or transfers per month. After that, there’s a $5 fee for each transaction from the bank.

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BancorpSouth Performance Savings

Earn a higher rate of interest by making a minimum monthly deposit.

Account holders can earn a higher interest rate on balances of $100,000 or less by making a minimum of $50 in total deposits into the account through either online banking transfer or ACH deposit. If you don’t make the minimum deposit, your account will earn the standard rate of interest. Call BancorpSouth to learn about the current rates.

  • Minimum opening deposit: $50
  • Minimum balance to earn APY: $0.01
  • Monthly account maintenance fee: $2.50 (waived if you maintain a minimum balance of $50)
  • ATM fee: No fee for using BancorpSouth ATMs. If you use an out-of-network ATM in the United States, you may be charged a fee by both BancorpSouth and the ATM’s owner. Call BancorpSouth to ask about current fees associated with out-of-network ATMs. If you use a foreign ATM, you’ll pay $2 per transaction, plus a 2% cross-border fee.
  • ATM fee refund: None
  • Overdraft fee: $36 per item

This savings account is an option if you plan to save at least $50 per month and can take advantage of the bonus interest rate. Even if you skip a month, the service fee is half that of the My Goal Savings account.

Again, watch out if you plan to make a lot of withdrawals each month. You’re allowed up to six certain withdrawals or transfers each month, per Federal Regulation D. After that, there’s a $5 fee for each transaction from the bank.

You cannot open a Performance Checking account online. Use BancorpSouth’s Find a Branch tool to locate a branch near you and sign up in person.

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BancorpSouth Select Savings

This account has a higher minimum balance requirement to open an account and avoid fees, but it also earns a higher interest rate.
APYMinimum Balance to Earn APY
0.25%$0.01
  • Minimum opening deposit: $1,000
  • Minimum balance to earn APY: $0.01
  • Quarterly account maintenance fee: $15 (waived if you maintain a minimum balance of $1,000)
  • ATM fee: No fee for using BancorpSouth ATMs. If you use an out-of-network ATM in the United States, you may be charged a fee by both BancorpSouth and the ATM’s owner. Call BancorpSouth to ask about current fees associated with out-of-network ATMs. If you use a foreign ATM, you’ll pay $2 per transaction, plus a 2% cross-border fee.
  • ATM fee refund: None
  • Overdraft fee: $36 per item

For people with a little more money available to open an account, the Select Savings account pays a higher rate of interest than you’ll get from BancorpSouth’s My Goal Savings account. This account does have a quarterly maintenance fee, but you can avoid it by keeping a minimum of $1,000 in the account.

Per Regulation D, you’re allowed up to six certain withdrawals or transfers each month. After that, there’s a $5 fee for each transaction from the bank.

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BancorpSouth Young Savers Savings

A low-fee alternative for teaching your children how to save.

Call BancorpSouth to learn about the current rates.

  • Minimum opening deposit: $25
  • Minimum balance to earn APY: $0.01
  • Monthly account maintenance fee: $0
  • ATM fee: No fee for using BancorpSouth ATMs. If you use an out-of-network ATM in the United States, you may be charged a fee by both BancorpSouth and the ATM’s owner. Call BancorpSouth to ask about current fees associated with out-of-network ATMs. If you use a foreign ATM, you’ll pay $2 per transaction, plus a 2% cross-border fee.
  • ATM fee refund: None
  • Overdraft fee: $36 per item

This account is only available to account holders below 17 years of age and requires a parent or guardian over 18 to be a joint account holder. Once the account holder reaches age 18, the account will convert to a My Goal Savings account.It’s a good account for teaching kids the value of savings because the minimum opening deposit is low, there’s no minimum balance requirement and no monthly service charge.

You’re allowed up to six certain withdrawals or transfer each month, per Regulation D. After that, there’s a $5 fee for each transaction imposed by the bank.

You cannot open a Young Savers Checking account online. Use BancorpSouth’s Find a Branch tool to locate a branch near you and sign up in person.

How to get a Bancop South savings account

You’ll need to provide some basic personal information, such as your name, Social Security number, date of birth, address and driver’s license number. You’ll also need details for your current U.S. checking or savings account to fund your new account. If you don’t already have a U.S. checking or savings account, you’ll have to apply in person at a BancorpSouth location.

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How BancorpSouth’s savings accounts compare

These savings accounts make it easy to avoid monthly or quarterly account maintenance fees, but their interest rates aren’t really that competitive. You’ll earn a better return on your money by opening one of these top online savings accounts.

BancorpSouth’s CD rates

BancorpSouth Certificate of Deposit

Earn a higher rate of return than a standard savings account.

Interest rates are determined at the time of purchase. Call BancorpSouth to discover current rates.

  • Minimum opening deposit: $1,000 – $5,000, depending on maturity
  • Minimum balance amount to earn APY: $1,000 – $5,000, depending on maturity
  • Early withdrawal penalty: Early withdrawal penalties apply. Call BancorpSouth to learn more.

If you want to earn a higher rate of interest and don’t mind tying up your money for anywhere from one to 60-plus months, consider a BancorpSouth CD. The longer the term, the higher the rate.

You can open a CD with BancorpSouth with as little as $1,000, so there’s a low barrier to entry.

You cannot open a BancorpSouth CD online. Use their Find a Branch tool to locate a branch near you and apply in person.

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How BancorpSouth’s CD rates compare

BancorpSouth doesn’t publish their CD rates online, so it’s impossible to know how they compare to the CDs that you can get elsewhere. However, we do like their low opening balance requirements and a variety of maturity terms.

BancorpSouth’s money market account options

BancorpSouth Money Market Select

Earn tiered interest rates based on your account balance.
APYMinimum Balance to Earn APY
0.10%$0.01 - $9,999.99
0.10%$10,000 - $24,999.99
0.15%$25,000 - $49,999.99
0.20%$50,000 - $99,999.99
0.25%$100,000 - $149,999.99
0.30%$150,000 - $499,999.99
0.50%$500,000+
  • Minimum opening deposit: $1,000
  • Minimum balance to earn APY: $0.01
  • Monthly account maintenance fee: $10 (waived if you maintain a $10,000 minimum monthly ledger balance)
  • ATM fee: No fee for using the bank’s ATMs. If you use an out-of-network ATM in the United States, you may be charged a fee by both BancorpSouth and the ATM’s owner. Call the bank to ask about current fees associated with out-of-network ATMs. If you use a foreign ATM, you’ll pay $2 per transaction, plus a 2% cross-border fee.
  • ATM fee refund: None
  • Overdraft fee: $36 per item

You’ll only need $1,000 to open a Money Market Select account, but you’ll need 10 times that amount to avoid the monthly fee mentioned above. If you can clear that hurdle, this is a way to earn a little more interest than you’d get from some of the bank’s checking account options. You’ll have access to unlimited over-the-counter and ATM transaction, but more than six withdrawals during any given month will hit you with a $10 fee per withdrawal.Keep in mind, though, you must have a BancorpSouth checking account to open a Money Market Select account.

How to get BancorpSouth’s Money Market Select account

You’ll need to provide some basic personal information, such as your name, Social Security number, date of birth, address and driver’s license number. You’ll also need details for your current U.S. checking or savings account to fund your new account. If you don’t already have a U.S. checking or savings account, you’ll have to apply in person at a BancorpSouth location.

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How BancorpSouth’s money market accounts compare

This account has a low opening deposit requirement, but the interest rates are low, too. You could potentially earn a better rate of return with a money market account from an internet bank.

BancorpSouth’s IRA account options

IRA

BancorpSouth’s IRA lets you save for retirement with flexible contribution options.

Call BancorpSouth the learn the current rates.

  • Minimum opening deposit: Call the bank to learn more
  • Minimum balance to earn APY: Call the bank to learn more
  • Monthly account maintenance fee: None

If you’re under age 70½, you can contribute to an IRA and take advantage of potential tax savings. BancorpSouth’s IRA does not charge a monthly service fee, however, if you need to withdraw funds early, those withdrawals may be taxed as earned income and incur an early withdrawal penalty.

You’ll have to call the bank to learn more about interest rates associated with this account and how to open the account.

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How BancorpSouth’s IRA accounts compare

We don’t know how BancorpSouth’s IRA CDs compare because the bank chooses not to advertise its rates. You’ll have to call to find out. If you do, be sure to compare the rates they’re paying to our list of the top IRA CD rates.

Overall review of BancorpSouth’s banking products

BancorpSouth does offer a wide variety of account options for checking and savings, and while many of their accounts to charge a monthly or quarterly service fee, they make it easy to avoid the fees by maintaining relatively low minimum balances, using your debit card, or using direct deposit.

But if you’re like most people, you probably want to put your money where it will earn the best interest rate. If that’s the case, BancorpSouth might not be the best option for you because their interest rates just aren’t competitive with those offered by other banks. With many of its rates not published online, the bank doesn’t make it easy for you to shop around.

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.

Janet Berry-Johnson
Janet Berry-Johnson |

Janet Berry-Johnson is a writer at MagnifyMoney. You can email Janet here

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Mortgage

Maine First-Time Homebuyer Programs

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.

Do you want to live in a state with gorgeous seaside views and fresh lobster? Maine just might be the right place. Whether you’re new to the state or already call it home, if you need help coming up with a down payment, Maine offers several programs designed to help first-time homebuyers make their homeowning dreams a reality.In January of 2019, we researched first-time homebuyer programs in Maine, which included a review of the Maine State Housing Authority website and other state resources. Here’s what first-time homebuyers in Maine need to know.

Maine first-time homebuyer programs

The Maine State Housing Authority administers several federal and statewide programs aimed at providing affordable homeownership for Maine residents.

Their programs provide fixed-rate mortgages and assistance with down payments and closing costs to help put homeownership within reach. Their mortgages also come with payment protection, in the event that buyers face unemployment.

Eligibility for Maine assistance

Homebuyers who wish to take advantage of one of the Maine assistance programs must meet income and purchase-price limitations. Income and purchase-price limits vary, depending on how many people live in your household and the county in which you buy a home. You can find a list of current income and purchase-price limits online.

Eligible properties include new and existing single-family homes, owner-occupied two- to four-unit apartment buildings and condominiums. Manufactured homes located on owned land and built within the last 20 years are also eligible. However, the purchase-price limit for single-wide and double-wide manufactured homes is $150,000.

MaineHousing First Home Loan Program

The MaineHousing First Home Loan Program provides low fixed-interest-rate mortgages with low or no down payments. It can also provide up to $3,500 in assistance with down payments and closing costs.

Features

The First Home Loan Program offers

  • Thirty-year fixed-rate mortgages
  • Low or no down payments
  • Up to $3,500 in down payment and closing cost assistance
  • Low fixed interest rates
  • Low- and no-point options
  • The option to finance between $500 and $35,000 for necessary home improvements in the same loan

Eligibility

In order to participate in the program, you must

  • Have a minimum credit score of 640.
  • Take an approved homebuyer education class before closing if you take advantage of the down payment and closing cost assistance option.
  • Contribute at least 1% of the loan toward the purchase price of your home (the cost of the homebuyer education class counts toward this 1%).
  • Be a first-time homebuyer (not have owned a home within the past three years) or a veteran, retired military or on qualified Active Duty.
  • Meet household income limits, which vary by county and household size.

How it works

The First Home Loan Program is available through a network of approved banks, credit unions and mortgage companies. You can begin the application process by contacting one of more than 40 approved lenders. The lender can help you determine how much home you can afford, decide on the right mortgage program and take you through the process of applying for and closing on the loan.

Learn more

MaineHousing Salute ME & Salute Home Again programs

The Salute ME and Salute Home Again programs help qualified active duty, veterans and retired military personnel achieve homeownership by giving them a 0.25% discount on First Home Loan mortgages.

Features

The Salute ME and Salute Home Again programs offer

  • An additional 0.25% discount on 30-year mortgages offered through the First Home Loan Program
  • Low or no down payments
  • Up to $3,500 in down payment and closing cost assistance
  • Low fixed interest rates
  • Low- and no-point options
  • Option to finance between $500 and $35,000 for necessary home improvements in the same loan

Eligibility

In order to participate in the programs, you must

  • Take an approved homebuyer education class prior to closing if you take advantage of the down payment and closing cost assistance option.
  • Have a minimum credit score of 640.
  • Be on active duty or have been honorably discharged from military service, have served on active duty for 180 days or within a war zone.
  • Use your new home as a primary residence.
  • Meet household income and purchase-price limits, which vary by county and household size.

How it works

MaineHousing programs are available through a network of approved banks, credit unions and mortgage companies. You can begin the application process by contacting one of more than 40 approved lenders. The lender can help you determine how much home you can afford, decide on the right mortgage program and take you through the process of applying for and closing on the loan.

MaineHousing Mobile Home Self-Insured Program

The MaineHousing Mobile Home Self-Insured Program allows manufactured/mobile home buyers to get higher loan-to-value (LTV) mortgages and pay a higher interest rate instead of mortgage insurance premiums (MIPs).

Features

The Mobile Home Self-Insured Program offers

  • Up to 30-year loan terms
  • Down payments as low as 5%
  • Up to $3,500 in down payment and closing cost assistance
  • The option that 3% of the purchase price may come from a seller contribution
  • The option to add up to $35,000 to the loan for repairs

Eligibility

In order to participate in the program, you must

  • Be a first-time homebuyer (not have owned a home in the past three years), have only owned an unattached manufactured/mobile home on leased land, or be a veteran.
  • Pay a maximum of 33% of your income toward housing and have a maximum total debt-to-income (DTI) ratio of 41%.
  • Have a minimum credit score of 640.
  • Meet income limits, which vary by county and household size.
  • Have a maximum purchase price of $150,000.
  • Purchase a single-wide or double-wide manufactured home that is less than 20 years of age and is permanently attached per code at the time of closing.
  • Move into the home as your main residence.
  • Not use more than 15% of the home for a trade or business.
  • Contribute a minimum of 3% toward the purchase of the home.

How it works

MaineHousing programs are available through a network of approved banks, credit unions and mortgage companies. You can begin the application process by contacting one of more than 40 approved lenders. The lender can help you determine how much home you can afford, decide on the right mortgage program, and take you through the process of applying for and closing on the loan.

National first-time homebuyer programs

If you want to buy a home in Maine, you’re not limited to first-time homebuyer programs available through the Maine State Housing Authority. There are other federal programs available to help first-time homebuyers across the country. If you’re interested in learning about national programs, start by checking out LendingTree’s guide to first-time homebuyer programs nationwide.

This article contains links to LendingTree, our parent company.  The information in this article is accurate as of the date of publishing.

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.

Janet Berry-Johnson
Janet Berry-Johnson |

Janet Berry-Johnson is a writer at MagnifyMoney. You can email Janet here

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Mortgage

The Complete Guide to FHA Loans

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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Saving up for a big down payment on a home can be a financial obstacle that prevents first-time homebuyers with little savings from ever becoming homeowners. Fortunately, government-backed Federal Housing Administration (FHA) loans can help potential homebuyers who want a home but struggle to pull together a large down payment. In 2018, more than 80% of FHA loans made were to first-time homebuyers, according to the U.S. Department of Housing and Urban Development.

This guide will cover the pros and cons of using an FHA loan to purchase a home and how homebuyers can begin the process of shopping and getting approved for these loans.

Part I: Understanding FHA Loans

What is an FHA loan?

FHA loans are insured by the Federal Housing Administration, which means that the federal government makes a guarantee to the bank that the government will repay the borrower’s loan if the borrower stops making payments. This guarantee means banks are willing to provide funding to borrowers who may not otherwise be able to qualify for a home loan.

FHA loans are not funded or underwritten directly by the FHA, but rather by FHA-approved lenders. These lenders can be found using the Lender Search tool. Interest rates and fees vary by lender, even for the same type of loan, so it’s important to shop around.

Benefits of FHA loans

FHA loans are designed to promote homeownership and make it easier for people to qualify for mortgages. For that reason, they typically have more flexible lending requirements than conventional loans, including:

Lower minimum credit scores

Many loan programs require a credit score of at least 620 or 640, but FHA loans are available to borrowers with scores as low as 500.

Lower down payments

Borrowers can get FHA loans with as little as 3.5% down. However, borrowers with credit scores between 500 and 579 will need at least 10% down.

Not just for first-time homebuyers

Although their flexible terms and low down payments make FHA loans appealing to first-time homebuyers, they’re also available to repeat buyers as long as the proceeds are used to purchase a primary residence.

Seller assistance with closing costs

Yael Ishakis, the vice president of FM Home Loans in Brooklyn, N.Y., says another benefit of FHA loans is that they allow sellers to pay up to 6% of the sales price toward buyer closing costs, including origination fees, points and other closing costs. This helps borrowers struggling to come up with a down payment cover some of the additional costs involved in closing on a home loan. Sellers may not be willing to pay closing costs in a hot housing market, but in a down market, helping with closing costs can mean a faster sale. For conventional loans, the seller can contribute no more than 3% toward closing costs unless the buyer has a down payment greater than 10%.

Drawbacks of FHA loans

FHA loans are appealing to many borrowers, but they’re not always the best choice. Here are a few reasons you may want to look into alternatives.

Mortgage insurance

FHA loans require mortgage insurance, which protects the lender against losses from defaults on home mortgages. FHA loans require both upfront and monthly mortgage insurance from all borrowers, regardless of the amount of the down payment.

On a 30-year mortgage with a base loan amount of less than $625,500 with a 3.5% down payment, the annual mortgage insurance premium would be 0.85% of the base loan amount, and the upfront mortgage insurance premium would be 1.75% of the base loan amount, as of this writing.

With a conventional loan, the borrower can avoid mortgage insurance by putting at least 20 percent down. They can also request to have their mortgage insurance premiums removed from their monthly payment once the loan is at 78% of the home’s current value, as long as the borrower has been making on-time payments for at least one year. With an FHA loan, mortgage insurance is required for the life of the loan.

Ishakis says this aspect of FHA loans causes her to hesitate before offering FHA loan options to buyers. If an FHA borrower’s home goes up in value, the only way to have the mortgage insurance removed is to refinance to a conventional loan.

The refi would require more paperwork, closing costs, and a potential increase to their interest rate if rates have increased. With a conventional loan, getting mortgage insurance removed simply requires sending a written request to the lender once you’ve met the requirements.

Documentation requirements

  • Most recent two months of bank statements
  • Most recent 30 days of pay stubs
  • Most recent two years of W-2s
  • Two years of tax returns
  • Gift letter (if using gifted funds for the down payment or closing costs)
  • Paper trail of gift funds, including a bank statement from the donor showing the funds were available at the time of gift, and verification of the funds being deposited into your account.

If you have been divorced in the past, declared bankruptcy, are self-employed, or earn income based on commissions, you may be required to provide even more documentation.

FHA Loan

Conventional Loan

Minimum credit score

500

620

Minimum down
payment

3.5%

3%

Maximum seller-
assisted closing costs

6%

  • 3% with down payments
    less than 10%

  • 6% with down payments
    between 10% and 25%

  • 9% with down payments
    greater than 25%

Upfront mortgage
insurance

1.75%

None

Monthly mortgage
insurance

0.85%

Varies based on credit score
and loan-to-value ratio

Borrowers who are able to qualify for a conventional loan may be better off choosing a conventional loan rather than an FHA loan. Conventional loans programs like Fannie Mae Home Ready® and Freddie Mac Home Possible® require a slightly lower down payment and do not require any upfront mortgage insurance.

Borrowers can request to have their monthly mortgage insurance payments removed once they have at least 20% equity in the home and make on-time payments for one year. The lender will probably require you pay for an appraisal to verify the value supports you having 20% equity, but is worth it because removing mortgage insurance can add up to significant savings over the life of the loan.

Part II: FHA Loan Requirements

With their flexible requirements and low barriers to approval, FHA loans are some of the easiest loans to qualify for. Here’s a look at FHA loan requirements.

Minimum credit score requirements

The minimum credit score for an FHA loan with a 3.5% down payment is typically 580. If your credit score is between 500 and 579, you may be approved for an FHA loan, but you will need to put at least 10 percent down.

These are FHA guidelines, but individual lenders may have their own requirements, referred to as lender overlays. A particular lender may require a minimum credit score of 640 or higher, so if you are turned down for an FHA loan by one bank, it’s a good idea to try others.

Income requirements

The FHA does not have minimum or maximum income requirements. However, borrowers must have sufficient income to be able to afford the mortgage payments and their other obligations. Part of the approval process involves verifying your employment and income, but the amount you earn is not as important as the amount of income you have left over after paying your other monthly bills.

The only time you might run into income maximums is if you are applying for down payment assistance to help with the down payment on an FHA loan. In that case, your income will need to be below the program limit to be eligible for the down payment help.

Debt-to-income ratio requirements

Debt-to-income (DTI) ratio is another key metric FHA-approved lenders consider when determining whether you can afford a mortgage. DTI measures the amount of debt you have compared to your income, and it is expressed as a percentage.

Lenders look at two debt-to-income ratios when determining your eligibility:

  • Housing ratio or front-end ratio. What percentage of your income would it take to cover your total monthly mortgage payment? According to Kevin Miller, Director of Growth at Open Listings, lenders like to see a front-end ratio below 31% of your gross income, although approval with a percentage up to 40% is possible depending on the circumstance.
  • Total debt or back-end ratio. Shows how much of your income is needed to pay for your total monthly debts plus your future monthly mortgage payment. Miller says lenders prefer a back-end ratio of less than 43% of your gross income, although approval with a percentage of up to 50% is possible.

Down payment requirements

FHA loans require a down payment of at least 3.5% of the purchase price, or 10% if your credit score is below 580. In addition to the down payment, the borrower may have to pay other upfront costs including appraisal and inspection fees, upfront mortgage insurance, real estate taxes, homeowners insurance, homeowners association dues, and more.

However, the FHA allows sellers to cover up to 6% of closing costs and closing costs can be gifted from friends or family members.

Clear CAIVRS report

Any federal debt that hasn’t been repaid and has entered default status can prevent you from getting an FHA loan. The government keeps track of people who default on all types of federal debts, like government-backed mortgage loans, SBA loans, and even federal student loans.

The system they use to track defaults is called the Credit Alert Verification Reporting System (CAIVRS). Borrowers do not have access to CAIVRS, so you’ll have to consult an FHA-approved lender to learn whether you are in the system.

If the delinquency was for a prior FHA-backed loan, you’ll have to wait three years from the time that the Department of Housing and Urban Development (HUD) paid the mortgage lender’s insurance claim.

FHA loan limits

The FHA puts a cap on the size of a mortgage that it will insure. These loan limits are calculated and updated annually and announced by HUD near the end of each calendar year.

Because the cost of living can vary widely throughout the country, FHA loan limits differ from one county to the next. The national maximum for an FHA loan is currently $726,525, but in low-cost areas, the maximum can be as low as $314,827 for a single-family home. You can look up the limit in your area using HUD’s FHA Mortgage Limits lookup tool.

FHA mortgage limits are calculated based on 115 percent of the median home price in the county, as determined by the Federal Housing Finance Agency.

Property requirements

FHA loans are only available when the borrower intends to use the property as a primary residence — investment properties are not eligible.

In addition, the property you intend to purchase must meet certain requirements to qualify for an FHA mortgage. Every FHA loan a property appraisal and inspection by a HUD-approved home appraiser to verify the current market value and ensure it meets HUD’s minimum property standards.

The appraiser will look at the roof, foundation, lot grade, ventilation, mechanical systems, heating, electricity, and crawl space in the home. Their detailed standards are outlined in HUD’s Single Family Housing Policy Handbook, but essentially, the property must not be hazardous or threaten the health and safety of the buyer who will live in the home.

Safety hazards noted during the appraisal will not automatically disqualify the property from an FHA loan. If the issue can be corrected before final inspection — such as the seller repairing a leaking roof — the loan can move forward.

Part III: Types of FHA Loans

There are several types of FHA loans to meet the needs of different homeowners. Here’s a look at the options available.

Fixed-rate mortgages

Fixed-rate mortgages are the most common type of FHA loans. The borrower chooses a loan term between 10 and 30 years, and the interest rate will not change over the life of the loan.

Adjustable-rate mortgages

Adjustable-rate mortgages (ARMs) also have terms between 10 and 30 years, but as the name implies, the interest rate can change periodically, so the payments can go up or down. The initial interest rate on an ARM is lower than that of a fixed-rate mortgage, so this can be a good option for a borrower who plans to own their home for only a few years.

Many ARMs are hybrids, meaning there is an initial period during which the rate is fixed. After that, the rate changes at regular intervals. FHA ARMs are required by law to have caps that limit how much the rate can change at any one time and throughout the life of the loan.

FHA loans offer the following interest rate cap structures for ARMs:

  • One- and three-year ARM rates may increase by 1% annually after the initial fixed-rate period and 5% over the life of the loan.
  • Five-year ARM rates may either allow for increases of 1% annually and 5% points over the life of the loan, or increases of 2% annually and 6% over the life of the loan.
  • Seven- and 10-year ARMs may only increase by 2% annually after the initial fixed-interest rate period, and 6% over the life of the loan.

FHA reverse mortgages

Seniors with a paid-off mortgage or significant equity in their home may be able to access a portion of their home’s equity with an FHA Home Equity Conversion Mortgage (HECM), commonly referred to as a reverse mortgage.

The loan is called a reverse mortgage because instead of the borrower making monthly payments to the lender, as with a traditional mortgage, the lender makes payments to the borrower. The borrower is not required to pay back the loan unless the home is sold or otherwise vacated.

Many seniors use reverse mortgages to supplement Social Security income, meet unexpected medical expenses, make home improvements, or a combination of all of these. A meeting with a HUD financial counselor is needed before applying for a reverse mortgage to ensure that the borrower clearly understands the pros and cons of this complex mortgage.

Energy Efficient Mortgages

The FHA’s Energy Efficient Mortgage (EEM) program is designed to help homeowners save on utility bills by financing energy-efficient improvements with an FHA loan. The program is available as part of a home purchase or by refinancing the current mortgage.

To qualify for an EEM, the borrower must first get a Home Energy Rating Systems Report performed by a professional rater. The rater inspects everything in the home, from insulation to appliances and windows. Once the property’s current energy efficiency is calculated, the inspector makes recommendations for energy-efficient upgrades.

EEMs are available for $4,000 or 5% of the property value up to $8,000. If the EEM is included in the initial home purchase, you do not need to come up with a larger down payment.

FHA 203(k) loans

Homebuyers looking to buy a fixer-upper may be interested in an FHA 203(k) mortgage. This program allows homeowners and homebuyers to finance up to $35,000 into their mortgage for repairs and improvements.

These loans often make it possible for buyers to purchase and rehabilitate properties that other lenders won’t touch because the property is in such bad shape. The loan includes money to purchase the property, enough to make necessary improvements, and, in certain cases, enough to cover rent or the borrower’s existing mortgage for up to six months so the buyer has another place to live while the home is being renovated.

Part IV: Shopping for FHA Loans

As mentioned previously, FHA loans are notorious for requiring a lot of documentation. Here’s a list to get you started:

  • Addresses of your residences for the last two years
  • Social Security number(s)
  • Names and locations of your employer(s) for the last two years
  • Gross monthly salary at your current job(s)
  • Two years of completed tax returns (three if you are self-employed)
  • Two years of W-2s, 1099s, or other income statements
  • Most recent month of pay stubs
  • Recent statements for all open loans (such as student loans or car loans)
  • A year-to-date profit-and-loss statement for self-employed individuals
  • Most recent three months of bank, retirement, stocks, and/or mutual fund statements
  • Contact information for your landlord or current mortgage lender
  • Bankruptcy and discharge papers (if applicable)
  • Copies of driver’s license(s)
  • Social Security card(s)
  • Copy of divorce decree (if applicable)
  • Letters of explanation for any past credit issues, bankruptcies, or foreclosures (if applicable)
  • Gift letter if your down payment or closing funds are a gift from friends or family members
  • If you are refinancing or you own another property, you will also need:
  • Note and deed from current loan
  • Property tax bill
  • Homeowners insurance policy

Your lender will also have you sign multiple disclosure documents, including authorization to pull your credit report, verify your employment, and obtain a transcript of your tax return from the Internal Revenue Service.

As you get closer to your closing date, you may need to update many of these documents. For instance, if you provided a January bank statement and pay stubs when you started your loan process and your loan doesn’t close until March, your loan officer will likely need a copy of your February bank statement and pay stubs to finalize your loan.

Where can you compare FHA loan rates?

As mentioned above, FHA loans are not provided directly by the FHA, but by FHA-approved lenders, so rates can vary depending on which bank you work with. For that reason, it’s a good idea to shop around for the best rate.

Fortunately, some resources allow you to do a lot of your initial mortgage rate shopping online.

Check out LendingTree’s FHA loan rates here. By filling out an online form with questions about the type of property you’re purchasing, city, state, and a few other details, you can compare personalized rates from several lenders. Note: LendingTree is the parent company of MagnifyMoney.

Be sure you match up your quotes based on the same date, since interest rates
can vary daily. Double check to make sure you’re getting quotes on the same loan amount, loan term and loan type for each lender you get a loan estimate from.

Part V: The FHA Closing Process

The HUD Handbook 4155.2 explains the FHA loan process in detail, from identifying a lender to the lender’s responsibilities after the loan is closed. The time it takes to close on an FHA loan is pretty comparable to other types of loans. According to a recent Origination Insight Report from Ellie Mae, in October 2018, FHA loans for new purchases took an average of 45 days to close.

Here are the steps that apply to borrowers:

  1. Lender identification. Contact a HUD-approved lender to find out if you are eligible for an FHA loan. All of the major banks and many smaller, regional lenders participate in the FHA loan program.
  2. Loan application. The lender will help you complete a loan application and request a variety of financial documents, or you may be able to fill one out online.
  3. Lock in your interest rate. Your interest rate should be locked in soon as possible to prevent any changes to the payment or fees before closing. Be sure to get the lock confirmation in writing, and keep track of the expiration date.
  4. Case number assigned. Every FHA mortgage is assigned a case number that identifies the individual loan and borrower.
  5. Property appraisal. The lender will order a property appraisal from a HUD-approved appraiser to verify the market value of the home and that it meets all of HUD’s property requirements.
  6. Mortgage underwriting. The underwriter reviews your file in accordance with HUD’s guidelines to determine whether you have the ability to repay the loan. They’ll take a close look at your credit history, employment situation, income stability, debt-to-income ratio, and other factors.
  7. Underwriting decision. If your application is approved, you may need to provide a few more approval conditions, and once you meet those conditions, you are “clear to close” and will move on to the closing process. If your file is rejected for some reason, the lender will notify you and will likely tell you why the underwriter came to that decision — or make a counter-offer that may involve you making an additional down payment or paying off debt to qualify.
  8. Closing process. The lender “closes” the loan by having all documents signed, wiring the loan proceeds to the escrow account, and ensuring that all money is distributed to the appropriate parties. Borrowers should review all loan documents carefully to ensure accuracy. This is also the time when you’ll need to present a cashier’s check or wire funds from your bank to cover closing costs.

One warning about wires worth noting: always confirm wiring instructions directly with the title company handling your closing, using a phone number that you can verify with your purchase contract, or through the company’s directory. Wire fraud reached epidemic levels in 2018, and the scheme usually involve hackers gaining access to realtor, escrow officer, or attorney emails in order to defraud homebuyers into wiring closing funds into an account detailed in the email.

Institutional bank insurance does not cover losses due to wire fraud since you initiate and verify the accuracy of the information when you hit the send button. Extra care is well worth it to avoid losing hard earned down payment funds to a wire fraud scheme.

Before you sign

The closing process can be a ceremonious event. It will likely take place at the title company, or at the lender or attorney’s office. You’ll be handed a pen and a big stack of documents that require your signature.

A notary will likely be present to witness your signature. But don’t let the pomp and circumstance distract you from the task at hand: making one of the largest financial transactions of your life.

Before you get to closing, you should receive a loan estimate that lays out the important information about your loan, including the loan amount, projected interest rate, estimated monthly payment, and estimated funds required to close. Your interest should be locked in. This means your rate won’t change between the offer and closing date, as long as there are no changes to your application and you close within the specified time frame.

At least three business days before closing, by law you should receive a Closing Disclosure form listing all final terms of the loan you’ve selected and final closing costs. When you sit down to sign the loan documents at closing, double-check the details to ensure your final documents agree with the Closing Disclosure. The Consumer Financial Protection Bureau has an excellent interactive tool explaining all of the parts of your Closing Disclosure and the details you should review.

Your lender or realtor should give you a list of items to bring with you to the closing. This will likely include a cashier’s check or proof of wire transfer for the funds you need to close and your driver’s license.

Ask questions to ensure you feel comfortable with everything you’re signing and make sure you know when and where to send your first mortgage payment and when it will be due.

Closing costs to consider

Your Closing Disclosure will show all of the closing costs required to finalize your loan. Some of them may be financed into your loan, some may be paid by the seller, and some are your responsibility. Closing costs vary based on where you live and the property you buy. Here’s a list of some common ones:

  • Application fee. Covers the cost of the lender to process your application.
  • Appraisal. Paid to the appraisal company to confirm the value of your home.
  • Attorney fee. Paid to an attorney to review the closing documents on behalf of the buyer or lender.
  • Escrow fee. Paid to the title company or escrow company that oversees the closing of your home purchase.
  • Credit report. The cost of pulling your credit report and credit score.
  • Escrow deposits. You may be required to put down two months or more of property taxes and mortgage insurance payments at closing to set up your escrow account so the lender pays your property taxes and insurance when they come due.
  • Upfront mortgage insurance premium. FHA loans require an upfront mortgage insurance premium of 1.75% of the loan amount.
  • Homeowners insurance. Homeowners insurance covers possible damage to your home. The lender may require that you pay the first year’s premium at closing.
  • Origination fee. Covers the lender’s administrative costs.
  • Prepaid interest. The lender may require you to prepay any interest that will accrue between your closing date and the date your first mortgage payment is due.
  • Recording fees. Charges by your local city or county for recording public records.
  • Title company search. A fee paid to the title company for doing a thorough search of the property’s records to ensure that no one else has a legal claim to the property.

Closing costs typically run 3% to 5% of the loan amount.

This article contains links to LendingTree, our parent company.

FAQ

Still wondering whether an FHA loan is right for you? The following are some frequently asked questions about FHA loans that may help you decide.

Yes! FHA guidelines require borrowers to wait two years from the discharge of a Chapter 7 bankruptcy or one year from the discharge of a Chapter 13 bankruptcy before applying for an FHA loan. In addition to meeting the waiting period, borrowers with bankruptcies should be able to demonstrate that they’ve worked to re-establish good credit or chosen not to incur any new debts since the bankruptcy. Borrowers will also have to submit a letter of explanation detailing the circumstances that lead to the bankruptcy with their loan application.

Yes. Having a co-signer may improve your chances of getting approved for the loan, especially if it’s a high debt-to-income ratio holding you back from getting approved. The co-signer must also submit to an underwriter review of their income and credit as they will be liable for repayment of the loan if the borrower fails to meet their obligation.

The FHA does require that the co-signer be a family member, and the co-signer will likely be required to write a letter confirming the relationship. In rare cases, an underwriter may ask for some sort of proof of the relationship such as birth certificates of co-borrowing siblings.

Yes. You can refinance an existing mortgage to a new FHA loan in a streamline refinance as long as you’ve made at least six monthly payments on your current mortgage and it’s been at least 210 days since the closing of that loan. You cannot have any payments overdue by more than 30 days and no late payments in the past 90 days. If you qualify, the streamline refinance does not require an appraisal, credit qualification, or employment verification.

FHA loans allow you to take more cash out than a conventional loan, which can come in handy if you are trying to consolidate some debt, or need to do some upgrades and improvements to your home. The maximum amount you can borrow is 85% of your home’s value, which is higher than the 80% cap on a conventional cash-out refinance.

You can also refinance an FHA loan into a conventional loan. This is often a good option for borrowers whose home has increased in value substantially. Since some FHA loans require mortgage insurance be paid during the entire life of the loan, refinancing to a conventional loan can eliminate mortgage insurance.

No. While FHA loans are popular among first-time homebuyers due to their low down payments and flexible requirements, they are available to repeat buyers as long as the loan is being used to purchase a primary residence.

No. FHA loans are only available for purchasing a buyer’s primary residence. However, you can use an FHA loan to buy a property with up to four units, as long as you will live in one unit while renting out the others.

The FHA allows 100% of the down payment and closing cost funds to be gifted, as long as the donor signs a gift letter stating that the money is a gift and does not have to be repaid.

You will need to establish your relationship with the donor. The FHA only allows a gift to be provided by a family member, an employer or labor union, or a close friend with a clearly defined and documented interest in the borrower.

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.

Janet Berry-Johnson
Janet Berry-Johnson |

Janet Berry-Johnson is a writer at MagnifyMoney. You can email Janet here

Denny Ceizyk
Denny Ceizyk |

Denny Ceizyk is a writer at MagnifyMoney. You can email Denny here

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