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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.

Couple Celebrating Moving Into New Home With Champagne

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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The Pros and Cons of a Credit Union 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.

co-op shared branching for credit unions
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Though banks are better known, their not-for-profit cousins known as credit unions still command a significant chunk of the mortgage market. During the first quarter of 2019, credit unions originated 8% of mortgages in the United States, according to credit union consulting firm Callahan & Associates.

Often overlooked, credit unions can be a good option when shopping for a mortgage. Joining a credit union can make it possible for you to reap benefits such as lower origination fees or a more competitive interest rate.

This article will explore whether homebuyers might get a better deal from a credit union mortgage and the implications a relationship with a credit union might bring.

How is a credit union different from a bank?

Although credit unions fall under the umbrella of financial institutions, they differ from commercial banks in several key ways.

Banks are typically owned by their shareholders, credit unions are not-for-profit organizations owned by their members. This often translates to better rates and terms on their financial products.

While banks can serve the entire nation, credit unions tend to be community-based institutions that play a significant role in serving people in a local area.

“Credit unions are a really important part of the financial services fabric,” said Barry Zigas, director of housing policy at the Consumer Federation of America in Washington, D.C.

On the other hand, credit unions typically don’t offer the same suite of products that a larger bank is often known for. While you can take advantage of a checking, savings or individual retirement account, for example, you may find it challenging to access financial planning or investment services.

Below we highlight how credit unions stack up against banks.

Credit Union Commercial Bank
  • Not-for-profit organization
  • Member-owned
  • Typically have higher yields on deposit accounts
  • Typically have lower interest rates on credit and loan products
  • Membership is based on an affiliation or geographical location
  • Smaller branch and ATM networks
  • Federally insured up to $250,000 through the National Credit Union Administration
  • For-profit organization
  • Shareholder-owned
  • Yields are usually lower on deposit accounts
  • Interest rates on credit and loan products are usually higher
  • Anyone can establish a relationship with a bank
  • Larger branch and ATM networks
  • Federally insured up to $250,000 through the Federal Deposit Insurance Corp.

Getting a mortgage from a credit union

One of the main differences when applying for a mortgage through a credit union rather than a traditional bank is that you must be a member of the credit union before you can attempt to borrow money.

Credit union customers own “shares” in the institution, typically via a $5 deposit held in a particular savings account.

In order to become a member, you must meet the membership requirements outlined by the credit union you’re interested in joining. Credit union members have a common bond, which could be any of the following, according to the National Credit Union Administration:

  • An employer.
  • A geographical location where those interested in joining live, work, worship or attend school.
  • A group membership, such as a homeowners association or labor union.

Family members of credit union customers are also often eligible to join.

One of the key reasons for choosing a credit union: You may be able to save money on lender fees, said Bruce McClary, vice president of communications at the National Foundation for Credit Counseling. A credit union may also be more flexible with credit score requirements than a bank and may offer lower mortgage interest rates.

However, since credit unions are small organizations, there’s the risk that your credit union’s name or ownership could change. Your credit union could also sell the rights to service your mortgage to a third party, which may impact your customer service after your loan closes.

“Even though you may be saving money on origination fees and you may not be paying as many other fees with your mortgage — so it might be more affordable at the onset — you may end up having to deal with a servicer that you weren’t dealing with before, rather than dealing with your credit union,” McClary said.

It’s important to note that bank-originated mortgages can also be sold and handed over to other servicers, so this issue isn’t unique to credit unions.

Still, developing a relationship with a credit union over time — as in, the organization’s representatives are very familiar with you and your finances — could work in your favor when you decide to apply for a mortgage, McClary said.

“Being a member of the credit union might actually put you in an advantage in terms of approval or maybe in terms of negotiating terms of the mortgage in the application process,” he said.

Pros and cons of a credit union mortgage

Consider the following benefits and drawbacks of a credit union mortgage before you choose this type of lender for your home purchase.

Pros

  • Potentially lower origination fees and other lending costs.
  • Mortgage rates may be lower.
  • A greater sense of community, since the institution is member-owned.
  • Potential for more negotiating room during the mortgage lending process.
  • Shared branching benefits, which allow you to use the services of an outside credit union.

Cons

  • You must meet eligibility guidelines to join the credit union and become a member before applying for a mortgage.
  • Credit unions typically have smaller branch networks.
  • There’s the risk of your credit union closing, switching owners or going through some other changes, which can affect how your mortgage is serviced.
  • Typically carry fewer product offerings than traditional banks.
  • May have limited online banking capabilities.

The bottom line

A traditional bank isn’t your only option for getting a mortgage. Depending on what your lending needs are and how much you value building a relationship with your financial institution, a credit union might be right for you.

However, if you’re concerned about mortgage servicing, be sure to check with your credit union for more information about how they plan to handle your mortgage once it’s originated.

“I think consumers who are members of credit unions should certainly go to their credit union and find out what their loan terms are, what the application process is like and maybe even ask, ‘Are these loans that you hold or are these loans that you sell off?’” Zigas said.

Zigas also recommended practicing that same due diligence with other types of mortgage lenders and shopping around.

“It’s a very competitive environment, and there’s no assurance that your credit union will actually be offering you the best possible rate,” he said.

It pays to comparison shop before you settle on a particular mortgage lender. For example, if you were looking to buy a house that required a $300,000 mortgage, you could potentially save more than $42,000 in interest over the life of a 30-year term by shopping for the best rate, according to data from LendingTree’s latest Mortgage Rate Competition Index.

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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We Downsized Our House So We Could Travel the World

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.

Purchase agreement for house

You’ve settled into your dream house and have called it home for years. But now you realize your family has more house than it actually needs, plus a large mortgage to match. Is it time to downsize?

The answer depends on what your financial and lifestyle goals are. Below, we share one story about a Florida-based family downsizing their home. Giving up 1,600 square feet allowed them to pay off their mortgage in a fraction of the time and achieve their goals of globe-trotting.

Keith and Nicole’s downsizing story

Keith and Nicole DeBickes loved their house in Delray Beach, Fla., but with more than 3,500 square feet of living space, it was perhaps larger than they actually needed at the time. “One day, I came to the realization that I had a 400-square-foot bathroom that I spent 20 minutes a day in, and we had this big formal dining room and formal living room that we never used,” Nicole said. “And we had a really big mortgage to cover it.”

She also wasn’t thrilled with the schools in the area — or with the idea of paying for private education. She and Keith knew they had to make a change.

The DeBickes (who work as an engineer manager and software engineer, respectively, and make between $100,000 and $200,000 combined annually) put their house on the market and started looking for a smaller home that was zoned for better schools.

They eventually settled on a 1,900-square-foot, four-bedroom house in Boca Raton. “We wanted to buy with the idea that we’d have a much smaller mortgage and we wouldn’t have to pay for private school,” Nicole said. “Then we could do things with our family like travel or retire earlier.”

The couple took out a 30-year mortgage for $110,000 in 2007, much smaller than what they had before. They then refinanced into a 15-year loan for $150,000 in 2009 to remodel their kitchen and upgrade their electrical work.

Pros and cons of downsizing your home

Deciding to downsize your house is a major decision that takes a good amount of effort and planning. Consider the following pros and cons before you choose to move forward.

Pros

  • Reduces your mortgage debt.
  • Potentially reduces other housing-related expenses, such as utilities.
  • Frees up cash to reduce or eliminate non-mortgage debt.
  • Gives you a smaller house to maintain.

Cons

  • Reduces your available square footage, giving you less space than you’re used to.
  • Unless you have enough equity to cover the purchase of your new home, you must qualify for a new mortgage.
  • You’ll have to sell your existing home.
  • You will have to shell out thousands of dollars for both your home sale and new home purchase.

Tips to pay off your mortgage more quickly

The DeBickes didn’t like the idea of having a mortgage on their downsized home. “We didn’t want to be working every month for a mortgage,” Nicole said. “We don’t like debt, and we wanted it to be gone.”

The couple buckled down and started making double and triple payments every month on their home loan. They drove older cars, carpooled to save on gas and maintenance and packed lunches to cut down on their food costs. The family took relatively modest vacations, staying with family or driving to the west coast of Florida.

All their diligence paid off — the DeBickles submitted their last mortgage payment in fall 2013.

If you’re on a mission to be mortgage-free sooner rather than later, here are tips to help you get there:

  • Make extra principal payments each month. Try rounding up your monthly mortgage payment. For example, if your payment is $1,325 every month, pay $1,400 instead or increase the amount by even more, if your budget allows. Be sure to communicate to your lender that you want the extra payments applied to your principal balance and not your interest.
  • Pay biweekly instead of monthly. Split your monthly mortgage payment into biweekly payments. Since there are 52 weeks in a year, you would make 26 half payments, or 13 full payments. Making one extra full payment each year could allow you to shave a few years off your mortgage term.
  • Consider recasting your mortgage. If you have at least $5,000 or $10,000 — depending on your lender’s requirements — you could use that lump sum to recast your mortgage. A mortgage recast allows you to lower your monthly payments by paying your lender a set amount of money to reduce your mortgage principal.
  • Dedicate windfalls to paying down your principal. Every time you get a tax refund, bonus or some other windfall, use it to pay down your outstanding loan balance.

Achieving financial freedom

Although they’re now mortgage-free, the DeBickes were still putting money away like crazy. They eventually quit their jobs (temporarily) and traveled abroad for two years with their boys, who were 10 and 7 in 2015. Without a mortgage payment, they were able to amass the $190,000 they thought they needed to travel for 28 months. “We have been living on one salary and saving or paying off the house with the other for 12 years,” Nicole said.

Despite their hefty savings goals, they’ve been able to take the boys to Europe and Costa Rica, too. “We want to really get them prepared for what travel is going to be like,” Nicole said.

The trip, which is outlined on the family’s website, FamilyWithLatitude.com, took the foursome everywhere from Ireland to France, among other spots. Nicole and Keith “road schooled” their children as they traveled, with the help of Florida’s virtual school program that allows them to take classes online.

They planned to rent their home while they were away, which will help finance part of the trip and cover some house expenses, such as insurance and property taxes. In the meantime, they are maxing out their 401(k)s and taking care of college funds for the boys.

“(In 2014) we were able to purchase the prepaid college plan for my youngest son in a lump sum,” said Nicole, who had already done the same thing for her eldest. “So I know that both boys have good college funds to take care of them.”

The bottom line

If you’re looking to move into a smaller home and save money in the process, it might make sense for you to downsize. Just be sure you’re clear on the benefits and drawbacks, and how the choice to cut down your square footage would align with your personal goals.

In the end, the lack of debt will allow the DeBickes the freedom to not only to travel the globe, but to hang out with the important people in their lives.

“With both of us working, we haven’t been able to spend as much time with the kids as we wanted,” Nicole said. “It’s a real luxury that we can do this. I’m looking forward to spending time together as a family.”

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.

Kate Ashford
Kate Ashford |

Kate Ashford is a writer at MagnifyMoney. You can email Kate at [email protected]

Crissinda Ponder
Crissinda Ponder |

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

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