Which mortgage is right for you Part III

By Sharon Bartlett

Which mortgage is right for you? Part III FHA Loan: 2021 complete guide

Part one and part two of this series were mostly introductory, introducing you to ‘which mortgage is right for you’ and part three of this series is where we now start getting serious, diving deeper into mortgages.

In this article, we look into FHA loans.

• What is an FHA Loan? • What is the requirement of the FHA

Loans? • What are FHA Loan rates? • How does an FHA Loan work? • What is FHA Mortgage Insurance? • What are some benefits of an FHA

Loan?

Let’s get started. FHA loans are mortgages insured by the Federal Housing Administration. The insurance part protects the lenders which allow them to extend loan offers low-interest rates with eased requirements and a low downpayment (typically starting at 3.5%).

The FHA was introduced in 1934 and plays a critical role in helping to finance for the first time homebuyers, minority buyers, and/or buyers that have a poor credit history. Additionally, FHA loans can cater to people with moderate incomes or people who cannot afford a 20% down payment.

WHAT ARE THE STATISTICS ABOUT FHA LOANS?

In 2012, almost half of first-time home buyers got financed through FHA loans and first-time buyers made up about three-quarters of FHA home purchasers that year.

Looking at ethnicity, HUD reports that, FHA Loans account for more than half of all home loans for both African Americans and Hispanic buyers compared to onequarter of all home purchase mortgages nationwide.

As previously mentioned FHA loans are extremely flexible, which means they appeal more to first-time homebuyers or low to moderate income people. That is not to say that other people are locked out of using the FHA loans, no, in fact, FHA loans are open to every citizen in the country.

THE FHA LOAN REQUIREMENTS

The following are some of the requirements of the FHA Loans;

1. A 3.5% down payment if your credit score is 580 or higher 2. A 10% down payment if your credit score is 500-579 3. A debt-to-income ratio (DTI) of 50% or less 4. Documented, steady income and employment history 5. You’ll live in the home as your primary residence 6. You have not had a foreclosure in the last three years

You have to understand that these requirements are lenient compared to other types of mortgages and what they require.

Just to illustrate, a borrower with a credit score of 500 can easily borrow an FHA loan but for other loans, you must have a credit score of not below 620.

Additionally, looking at another factor of consideration, that is the Debt to income ratio, FHA loans allow borrowers to up to 50 percent in some cases while the max limit for DTI with conventional loans is 43%. What this means is that even if you carry more debt, you can still qualify for the FHA Loans.

In essence, borrowers do not need to have a lot of money saved up or even be in top-tier income earners. FHA loans are designed for people deemed ‘out of reach’ by the conventional loan.

FHA LOAN RATES

One of the many things there is to love about the FHA loans is they offer low-interest rates. Let’s compare the FHA rates with conventional loan rates.

LOAN TYPE CURRENT INTEREST RATE*

30-Year FHA Loan 2.75% (3.73% APR) 30-Year Conventional Loan 3.125% (3.125% APR) 15-Year FHA Loan 2.5% (3.442% APR) 15-Year Conventional Loan 2.75% (2.75% APR)

Looking at the data above, which by the way is up to date, you may worry because the APR for the FHA loans seems higher than that of conventional loans, but the APR takes into account the Mortgage Insurance Premiums while the conventional APR Rate only accounts for 20% downpayment and assumes that there is no private mortgage insurance.

HOW DO FHA LOAN WORKS

we‘ve talked about the FHA loan requirements, we’ve also covered the rates but how does it all work?

Well, what you need to first understand is that FHA doesn’t give you any loan. What happens is that you get the FHA loan from the bank or a lender, just as you would any other type of loan.

The Federal Housing Administration comes into

play to insure the loan. Simply put, they offer protection to the lenders just in case the borrower defaults on their loan.

THE FHA INSURANCE

Also called Mortgage Insurance Premium or MIP is what makes FHA Loans possible!

In turn, because of this security, they can offer loans at more flexible rates and looser standards for qualifying.

But there’s a catch… you have to pay for the insurance that protects the mortgage lender which is what I want to get deep into. Without the MIP many lenders wouldn’t have a reason to offer the FHA-Insured loans. When it comes to MIP, there are two kinds of MIP that are required for the FHA loan to work. One of the premiums can be payable as a lump sum at closing, while the other is payable as an annual premium. The best thing about this second option is that it gets cheaper as you pay off the loan;

• Upfront Mortgage Insurance Premium (UFMIP) = 1.75% of the loan amount for current FHA loans and refinances • Annual Mortgage Insurance Premium (MIP) = 0.85% of the loan amount most

FHA loans and refinances.

Going by 2020 rates, the MIP rates have dropped quite significantly and today’s FHA MIP costs are a much as 50 basis points (0.5%) lower per year than they were about 7 years ago.

In addition, as a homeowner, there are different ways through which you can reduce what you owe as FHA MIP, but this will largely depend on your down payment and loan term where you’ll find that it is possible to reduce the length of your mortgage insurance to 11 years rather than paying it for the life of the loan.

LOAN TERM ORIGINAL DOWN PAYMENT MIP DURATION

20, 25, 30 years Less than 10% Life of loan 20, 25, 30 years More than 10% 11 years 15 years or less Less than 10% Life of loan 15 years or less More than 10% 11 years

HOW TO FIND FHA LENDERS AND APPLY FOR THE FHA LOANS

FHA lenders are easy to find, but it is important that you understand that different FHAapproved lenders have different rates, costs, and underwriting standards even if the loan is the same. These loans are available through many sources, for instance, you can get an FHA loan through the big banks, credit unions community banks, and independent lenders among many others. But how do you apply for the FHA Loan?

HERE ARE A FEW STEPS THAT YOU MUST FOLLOW

Understand your budget; Before you go ahead and fill out a bunch of papers and submit your application for the FHA loan, it is important that you understand what your budget is and how much you can actually afford to spend on a home. Carefully review what you are earning right now, your monthly expenses, your savings, and get an estimate of what your monthly payments will be like. Experiment with different house prices and different sizes of down payments. a downpayment of as little as 3.5 percent. Any score between 500 and 579 will require you to make a 10 percent down payment which is still affordable.

FHA Loans give you a chance to stop renting

earlier: buying a home with FHA Loans becomes easier especially after the fact that you are only paying a smaller down payment. This means that you will start building your equity sooner. Instead of continuing to rent, FHA loans make the dream of owning a home possible and sooner.

Get your documents in order; let’s get one thing straight, applying for a huge chunk of money means that you are willing uncle sam to look under the hood of your finances. Therefore, before he does, it is imperative that you get your documents in order. Have these documents in order before applying; two years of tax returns; two recent pay stubs; your driver’s license; and full statements of your assets (checking account, savings account, 401(k), and any other places where you hold money).

Don’t settle with the first option; I have said this before! It is important that you take your time probing around, comparing rates and offers. Getting preapproved with multiple lenders is helpful. This will make sure that you get a taste of different refinance rates and terms to make sure you are getting the best the market has to offer.

WHAT ARE SOME BENEFITS OF AN FHA LOAN?

It doesn’t matter your credit score: people with low credit scores can still qualify for the FHA loans. If you haven’t established a solid credit history, or you’ve had trouble making on-time payments, and your credit score is a little bruised, you are not out of reach, you’re in good standing with FHA loans.

Low Downpayment: with an FHA loan, you have the option to make a smaller downpayment. With a credit score of about 580, you can make Now that you understand what FHA loans are, it is time that you get into your new home, if you would like to know more about these loans, Talk to our mortgage advisor Eric Lawrence Frazier the Founder and CEO of the Power Is Now Media, at 800-261-1634 ext. 703.

ABOUT SHARON BARTLETT

LIC#0684103 | Texas Sharon Bartlett is a real estate and mortgage industry expert with almost 40 years of experience. After spending 35 years at Freddie Mac, Sharon set out on a path to create her dream job. She started with her consulting firm, Sharon Bartlett Consulting, LLC, which led to obtaining her real estate sales license and then creating a real estate training company, the Real Estate Academy for Learning (REAL). Sharon recently became the National Director of Operations for US REO Partners, a nationwide real estate trade organization that connects and trains REO professionals. To read more about Sharon, go to; https://www.thepowerisnow.com/ sharon-bartlett/

Sources;

https://www.bankrate.com/mortgages/what-is-an-fha-loan/ https://themortgagereports.com/17567/fha-mortgage-rates-federal-housingadministration-assumable-203k-mip https://www.credible.com/blog/mortgages/fha-loans/ https://www.mortgageloan.com/fha

WHAT HOMEOWNERS SHOULD KNOW ABOUT TAX REFORM

Here’s what homeowners need to know about theTax Cuts and Jobs Act that was signed into law December 2017.

MORTGAGE INTEREST DEDUCTION

• The limit on deductible mortgage debt was reduced from $1 million to $750,000 for new loans taken out after 12/14/17. Current loans of up to $1 million are grandfathered and are not subject to the new $750,000 cap.

• Homeowners may refinance mortgage debts existing on 12/14/17 up to $1 million and still deduct the interest, so long as the new loan does not exceed the amount of the mortgage being refinanced.

• Interest paid on home equity loans is only deductible if the proceeds are used to substantially improve the residence.

• Interest remains deductible on second homes, but subject to the $1 million / $750,000 limits.

HOMEOWNERS

DEDUCTION FOR STATE AND LOCAL TAXES (SALT)

• If you itemize your tax return, you can claim up to $10,000 total for state and local property taxes and income or sales taxes. This $10,000 limit applies for both single and married filers.

• If you prepaid your 2018 state and local income taxes in 2017, you cannot deduct those taxes.

CAPITAL GAINS EXCLUSION

• Remains unchanged at $250,000 for single filers and $500,000 for joint returns if the house was lived in for two of the last five years.

HOUSING MARKET IMPACT

• California’s median home price is projected to increase 3.2 percent in 2018. Overall, home sales in California are expected to grow in 2018.

• The supply of available homes for sale will be slightly impacted, as homeowners may delay trading up/down to their next home.

• Overall, the California housing market is expected to see a decline of 0.3 percent in active listings in 2018.

Disclaimer: This is not intended to provide legal or tax advice. Application of provisions to particular tax situations need to be discussed with an accountant, CPA, or tax attorney.

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