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Guide to Getting a Federal Housing Administration (FHA) Mortgage Loan

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Saving up the traditional 20% for a mortgage down payment is the kind of financial obstacle that can bar first-time homebuyers with minimal savings from becoming homeowners. The government-backed Federal Housing Administration (FHA) mortgage is one solution for those who want to buy a home but can’t pull together a large down payment.

FHA mortgages are home loans funded by FHA-approved lenders and insured by the government.

The government 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 a minimum credit score of 500, and you only need to put 3.5% to 10% down to buy a home.

How much can an FHA mortgage help you?

For a $150,000 home, a 20% down payment would mean you would need to bring $30,000 (along with other closing costs) to the table. That’s no small chunk of change. By comparison, an FHA mortgage would require anywhere from 3.5% to 10% for a down payment, which comes out to $5,250 to $15,000.

In this post, we’ll cover the following topics to explain the FHA mortgage, including:

  • FHA mortgage terms
  • FHA qualifying criteria and restrictions
  • FHA costs and mortgage premiums
  • FHA mortgages vs. conventional mortgages
  • How to shop for an FHA mortgage

FHA mortgage terms

There are both 15- and 30-year fixed-rate and adjustable-rate FHA mortgage options. With a fixed-rate FHA mortgage, your interest rate is consistent through the loan term. However, your monthly mortgage payment may increase based on your homeowners insurance, mortgage insurance premium, and property taxes.

Adjustable-rate FHA mortgages are home loans where the rate stays low and fixed during an introductory period of time such as five years. Once the introductory period ends, the interest rate will adjust, which means your monthly mortgage payments may increase.

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 can change. Otherwise, a fixed-rate FHA mortgage has predictable mortgage payments and may be the way to go.

Qualifying criteria and restrictions

Although the FHA home loan is particularly appealing for first-time homebuyers, it’s not only open to first-time purchasers. Repeat buyers planning to use the home as a primary residence may qualify for an FHA home loan as well.

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

Debt-to-income (DTI) ratio is another key metric lenders consider in addition to your credit score to determine whether you can afford a mortgage. DTI measures the amount of debt you have compared to your income, and it’s expressed in a percentage.

Lenders look at two debt-to-income ratios when determining your eligibility — housing ratio or front-end ratio and your total debt ratio or back-end ratio.

Your front-end ratio is what percentage of your income it would take to cover your total monthly mortgage payment. Lenders like to see your front-end ratio below 31% of your gross income.

Your back-end ratio shows how much of your income is needed to pay for your total monthly debts. Lenders prefer a back-end ratio of 43% or less of your gross income.

FHA limits

The FHA mortgage can be used for both single-family and multi-family homes, but there are loan amount maximums that vary by state and county.

For an example, in Fulton County, Atlanta, the maximum loan for a single-family house is $342,700. You can find the loan limits for all states and counties here.

 

FHA mortgage costs and mortgage insurance premium

Just like a traditional mortgage, an FHA home loan has closing costs. Closing costs are the costs necessary to complete your transaction, such as appraisals and home inspections. However, you may be able to negotiate to have some of these costs covered by the seller.

The real expense of the FHA home loan lies in the mortgage insurance premiums.

At first glance, the FHA mortgage probably seems like the ultimate hack to buying a home with minimal savings. The flip side to this is you need to pay mortgage insurance premiums to cover the lender for the 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 for the FHA mortgage is currently 1.75% of the loan amount, and it can be rolled into your mortgage balance.

The annual insurance premium is broken into a payment that you make monthly. The annual premium for mortgage insurance can be up to 1.05% based on your loan term length, loan amount, and loan-to-value ratio (LTV).

LTV is a percentage that compares your loan amount to your home’s value. It also represents the equity (or lack of 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 mortgage insurance premium on a 30-year FHA mortgage (for loans less than $625,000):

  • 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 less equity (or a smaller down payment) will cost you more in insurance premiums. You can expect to pay 0.85% in annual mortgage insurance premiums if your down payment is 3.5% on the 30-year mortgage.

Unfortunately, if your LTV was greater than 90% at time of origination, insurance premiums tag along for the entire loan term or 11 years, whichever comes first. There are exceptions if you have an FHA mortgage that was taken out before June 3, 2013.

How does the FHA home loan compare to conventional home loans?

Government-backed home loans like the FHA mortgage are part of special programs that serve borrowers that can’t qualify for a traditional mortgage.

At the other end of the spectrum is the conventional mortgage or the “Average Joe” of mortgages.

These traditional mortgages are offered by lenders and banks backed by Fannie Mae and Freddie Mac’s mortgage standards. Fannie Mae and Freddie Mac are government-sponsored agencies that buy loans from mortgage lenders and banks that conform to preset requirements.

Since conventional mortgages are loans eligible to be purchased by Fannie Mae and Freddie Mac, the qualifying criteria bar is usually set higher. For instance, you should have at least a 620 credit score to qualify for a fixed-rate conventional loan. Although, credit score minimums vary by lender, and a score above 620 will be necessary for the most competitive interest rates.

A misconception about the conventional mortgage 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).

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 a removal of insurance payments when you build up 20% equity in your home.

On the other hand, the mortgage insurance premiums for new FHA mortgages (post 2013) can’t be removed unless you refinance.

When to choose a conventional mortgage instead

Putting down less money with the FHA mortgage 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.

But, the convenience doesn’t come without strings attached and the additional insurance costs can follow you for the entire loan term. This can get costly.

Furthermore, putting a small sum down on a home means that it will take you quite some time to build up equity. A small down payment can also increase your monthly payments. Homebuyers with a strong credit score should consider saving a bit more money and shopping for a conventional home loan first before thinking the FHA home loan is the only answer to a limited down payment.

You may be able to qualify for a conventional home loan with PMI if you have a down payment of 5% to 10%. 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.

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How to shop for an FHA mortgage

If your present credit score and savings make you ineligible for a conventional home loan, the FHA home loan is still a viable option to consider for financing. Just make sure you understand the implications of the extra cost.

Like a conventional mortgage, you need to shop around with multiple FHA-approved lenders to find the most competitive rate. If you’re unfamiliar with FHA-approved lenders in your area, you can go to the HUD website to find a few.

Don’t rush to a decision. If you’re not sure which option (FHA or conventional mortgage) will be the most cost effective for you, ask each lender you shop with to break down the costs for a comparison.

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.

Taylor Gordon
Taylor Gordon |

Taylor Gordon is a writer at MagnifyMoney. You can email Taylor here

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How to Host a Successful Garage Sale

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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Whether you’re prepping for a move or finally cleaning out the basement, decluttering your home can bring you peace of mind — and extra cash. Hosting a garage sale is a great way to get rid of old or unused items. Here are a few tips to help you make your sale as profitable as possible.

When is the right time for a garage sale?

Garage sales go by many names — yard sale, moving sale, tag sale, estate sale or rummage sale — but some portion of the event will likely take place outside. If you’re hosting your sale to get rid of stuff before a move, you’ll likely be stuck to a certain date, but if you have some flexibility, consider mild seasons like spring or fall. No one likes rummaging through old items in the blazing August sun, even for good deals.

How to prepare for a yard sale

While the concept of a garage sale is fairly simple, it’s easy to mess up. Many people who host a sale see little success — often because they failed to prepare. Sure, you can just set your unwanted items out on the lawn and have passersby stop and quickly sift through everything. But when you put in a little work ahead of time, the success of your sale is much greater.

“The more preparation that you can do, the more you’ll probably make,” said Ava Seavey, New York-based garage sale expert and author of Ava’s Guide to Garage Sale Gold.

Schedule wisely. First, you’ll want to pick a day for your sale, ideally a Friday or Saturday.  Then you’ll want to take the time to sort through your belongings and carefully select the items you want to sell, choosing items that people will actually find appealing and will want to buy.

Be strategic about prices. Seavey advised that costume jewelry, furniture and collectibles have the potential to make sellers the most money. However, how you price the items is key to ensuring you will earn what these items are worth.

“A good percentage of people who go to garage sales will pay what you have written down,” Seavey said. While some people will negotiate, if your stuff is priced correctly, people will pay it, she said.

Get the word out. You will also want to focus on advertising your sale in your local newspaper and online using garage sale-specific websites and social media channels. Go ahead and describe the types of items you’ll have for sale to attract the right customers.

Be prepared. You’ll want to make sure you have all the supplies you need, including:

  1. Tables
  2. Tablecloths
  3. Pricing labels
  4. Money apron (to hold cash)
  5. Bags
  6. Paper/newspaper (to wrap fragile items)
  7. Signs (to advertise the sale throughout the neighborhood)
  8. Notebook/ledger (to keep track of items sold and money collected)

This may seem like a lot to do in order to sell a few necklaces, purses or electronics. But this preparation can make your sale more appealing and profitable. If having your own sale sounds too time consuming to prepare, you and a friend, family member or neighbor could have the sale together.

What to expect during your garage sale

On the day of the garage sale, you’ll get a variety of customers depending on what you have available for purchase. If you have advertised correctly and have the right things for sale, you could draw in a large crowd.

“I would have plenty of things for everyone. Those are the best sales, when you have a variety,” Seavey said.

Try to keep the sale going from the morning to the late afternoon. Having a sale that lasts a few hours may hinder your ability to make money because you are limiting how many people will be able to come. If your sale starts in the morning and goes until later in afternoon, you can maximize the profits from the sale because those who could not make it during the morning hours can shop in the afternoon before the sale ends.

“There is no magic time to end, but you will do most of your selling in the morning,” Seavey said. “I like to go as long as I can.”

With the money you make from your sale, you can add to or start an emergency fund, pay past-due bills, or even purchase updated items for your new home if you are moving.

What to do after the yard sale

A successful yard sale will leave a lot of money in your pocket and very few unsold items on your lawn. Consider storing your newly acquired cash in an online savings account that earns you interest. If you’re stuck with leftover items, you can always hold another sale, or you can donate them to a charity, church or secondhand store. You won’t make any money when you go this route, but there are benefits to donating.

“You have unloaded everything, you’ve made some money and you have a tax write-off,” Seavey said. “It’s a win-win-win for everybody.”

A garage sale can be the answer when you want to rid yourself of unwanted items — and even make a little money in the process.

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.

Kristina Byas
Kristina Byas |

Kristina Byas is a writer at MagnifyMoney. You can email Kristina here

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What the End of HARP Means for Your 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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Home values have been on the mend since the financial meltdown of just a decade ago. This has been good news for people who have struggled with negative equity in their homes, meaning the value is lower than the amount they owe on their mortgage.

The percentage of “underwater” homes has dropped significantly, decreasing 16% year over year at the end of 2018 to comprise 4.1% of all mortgaged properties, real estate research firm CoreLogic found. But that means there are still homeowners who need assistance with recovering their equity.A popular government-sponsored refinancing program aimed at helping these homeowners has recently ended, and people looking for help getting above water may not be aware of the other options they have.

In this article, we highlight and explain what the closing of HARP means for homeowners and several available alternatives.

What is HARP?

The Home Affordable Refinance Program, known as HARP for short, is an initiative that helped underwater homeowners refinance their mortgage. The program was introduced in 2009 after the housing crisis.

HARP allowed eligible homeowners to refinance their mortgages to lower their mortgage interest rate or switch from an adjustable-rate to a fixed-rate mortgage even if they were underwater. Typically, lenders will not allow a borrower to refinance if the house is worth less than what is owed.

In order to qualify, homeowners needed to meet the following requirements:

  • No late mortgage payments over the last six months that were 30-plus days behind, and no more than one late payment over the last year.
  • The mortgage you’re attempting to refinance must be for your primary residence, a one-unit second home or a one- to four-unit investment property.
  • Your mortgage must be owned by Fannie Mae or Freddie Mac.
  • Your mortgage was originated on or before May 31, 2009.
  • Your loan-to-value ratio is more than 80%.

The program had been extended a few times, but the last HARP deadline was Dec. 31, 2018.

Fannie and Freddie’s HARP replacements

Government-sponsored enterprises Fannie Mae and Freddie Mac have refinance products in place that are meant to replace HARP.

Fannie Mae’s High Loan-to-Value Refinance Option

Beginning on Nov. 1, 2018, Fannie Mae has offered a high loan-to-value refinance option to borrowers with mortgages owned by the government-sponsored entity. The product is meant to make refinancing possible for borrowers who are maintaining on-time mortgage payments but have an LTV ratio that exceeds the amount allowed for standard refinance options.

Borrowers must benefit from the refinance through a reduction in their monthly principal and interest payment, a lower mortgage interest rate, shorter loan term or by switching to a fixed-rate mortgage. There is no maximum LTV ratio for fixed-rate mortgages; however, the maximum LTV for adjustable-rate mortgages is 105%.

The eligibility requirements include:

  • The loan being refinanced must be an existing Fannie Mae-owned mortgage.
  • The loan must have been originated on or after Oct. 1, 2017.
  • At least 15 months must pass between the loan origination of the existing mortgage and the refinanced mortgage.
  • Borrowers must be current on their mortgage, have no late payments over the last six months and only one 30-day delinquency over the last 12 months. Delinquencies longer than 30 days aren’t permitted.
  • The existing mortgage can’t be a Fannie Mae DU Refi Plus or Fannie Mae Refi Plus mortgage.

Freddie Mac’s Enhanced Relief Refinance Mortgage

Freddie Mac offers the Enhanced Relief Refinance mortgage to borrowers who are current on their mortgage but can’t qualify for a standard refinance because of a high LTV ratio. The mortgage being refinanced must meet the following requirements:

  • The mortgage must be owned or securitized by Freddie Mac.
  • The mortgage can’t have any 30-day delinquencies over the past six months and only one 30-day delinquency in the last year.
  • The closing date for the mortgage was on or after Oct. 1, 2017.
  • The mortgage can’t already be a Relief Refinance mortgage.
  • There should be at least 15 months between when the original loan was closed and the refinanced loan’s origination.
  • The loan can’t be subject to an outstanding repurchase request.
  • The maximum loan-to-value ratio for adjustable-rate mortgages is 105% and there’s no max for fixed-rate mortgages.

Borrower benefits include a lower interest rate, switching from an adjustable-rate to fixed-rate mortgage, shorter mortgage term or lower monthly principal and interest payment.

Alternatives to refinancing when you’re underwater

If refinancing your mortgage doesn’t sound like the best move for you, consider one of the following alternatives.

Mortgage modification

A mortgage modification is a way to change the original terms of your loan without going through the refinancing process. In some cases, you can work with your lender to switch from an adjustable-rate to a fixed-rate mortgage, extend your loan term, lower your interest rate or add past-due amounts to your unpaid principal balance.

Modifying a mortgage could be beneficial for homeowners facing hardship who aren’t eligible to refinance and are delinquent on their mortgage payments or expect they will eventually fall behind.

Mortgage recasting

If you have a lump sum of at least $5,000 in cash, you could potentially recast your mortgage. A mortgage recasting results in lower monthly mortgage payments. You pay a lump sum of cash to your lender to reduce your outstanding loan principal amount, then your loan is reamortized based on the lower remaining principal balance. Your interest rate and loan term stay the same.

This option makes sense if you’re expecting a bonus from your employer, a large income tax refund or some other financial windfall.

The bottom line

Although HARP has come to an end, there are still options for mortgage borrowers with Fannie- or Freddie-owned loans. In order to qualify for the enterprises’ refinancing programs, it’s helpful to maintain on-time payments even when your loan amount exceeds your home’s value.

If you don’t qualify, be sure to strategize on how best to attack your mortgage balance and rebuild equity. Consider making extra mortgage payments whenever possible by freeing up room in your budget, earning extra income or dedicating unexpected money to your mission.

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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