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Because of the subprime mortgage meltdown and the global financial crisis of 2009, home mortgages have become more difficult to obtain. Even borrowers with higher credit are often necessary to pay higher rates of interest and set more money down when purchasing a house or refinancing. Borrowers with bad credit or little credit rating may find it very difficult to get home financing. For many borrowers, an FHA mortgage appears like a great choice.
What is an FHA mortgage? The term is usually misunderstood, and lots of buyers believe that FHA mortgage rates are set through the government and therefore are provided to the general public.
This is not what the FHA does. The FHA (the Federal Housing Administration, which is a part of the U.S. Department of Housing and concrete Development, or HUD) does not make loans. The FHA does not set home loan rates or sell houses. The FHA works together with banks and FHA-approved lenders to insure mortgages on single family and multifamily homes in the United States. Since its inception in 1934 the FHA is just about the world's largest insurer of mortgages, covering over 34 million properties.
So how exactly does the FHA help homebuyers? By providing insurance to lenders to ensure that should you default in your mortgage, the FHA pays off the lender. It is a type of pmi, only it's provided by the U.S. government. This insurance allows a lender to make home loans to borrowers who may have a bad credit score or who otherwise would not qualify for an excellent loan rate.
Determining Your FHA Type of loan
When you attend an FHA-approved lender to try to get a mortgage, the lending company may ask you to apply for an FHA mortgage (remember, case a phrase of convenience; your mortgage can come out of your lender, not the FHA). As part of the application you will be inspired to complete a separate FHA mortgage application. You will need to supply details about your previous addresses, your history of employment, W2 forms, and federal tax forms for the past two years. Based on the information you provide, as well as the results of an FHA investigation into your credit history, the FHA may qualify you and offer to insure your mortgage.
The FHA offer to insure will allow your lender to provide you with better terms-perhaps by giving a lower interest rate or accepting a payment in advance as low as 3.5%. Here are some from the factors that will determine your FHA type of loan:
o Quantity of loan
o Period of loan
o Adjustable-rate (ARM) or fixed-rate
o Amount of down payment
o Discount points
o Settlement costs
o Your credit rating
o Your credit report
o Your earnings level
o Lock-in period
o Conforming loan limits
Let's review a few of the factors affecting your FHA type of loan. For example, the loan period is a significant factor. Shorter loans (say, Fifteen years) will raise the cost of your monthly payments and can help you save 1000s of dollars in charges over the lifetime of the loan.
At the beginning of every year Fannie Mae and Freddie Mac establish conforming loan limits, which might affect your interest rate. If the amount you borrow exceeds the conforming loan limits that have been set for the year, your interest rate might be higher.
A variable rate mortgage may initially give you a lower rate than a fixed interest mortgage, however your payments are susceptible to increase when the interest rate changes.
How big your deposit will also affect your rate of interest. While FHA loans permit down payments no more than 3.5%, a bigger deposit, especially more than 20%, can get you the best available rates. The greater money you can offer as a down payment the better deal you will get, because it shows the lending company that you're able to saving money and you are serious about your finances. And because you are borrowing less, your monthly obligations will be lower.
There are many factors which go into managing your FHA mortgage rate. It is worthwhile to try to get an FHA mortgage to get the best deal possible.
