Discovering the right FHA lender for your needs can feel like finding a needle in a haystack, but fear not. Here’s your comprehensive guide to navigating the search for the perfect FHA mortgage:
How to find the best FHA loan lender
When seeking the ideal FHA lender, explore traditional avenues such as banks, credit unions, and mortgage companies. Although the Federal Housing Administration backs these loans, private lenders provide and underwrite them. Start by perusing the Department of Housing and Urban Development’s (HUD) website for a roster of FHA-approved lenders. Additionally, banks and mortgage firms often advertise their FHA affiliation.
Compare the comprehensive costs of FHA mortgages from at least three leading lenders. Begin your search with institutions you already patronize, like your preferred bank or credit union, as they may offer FHA loans.
Consider engaging a mortgage broker specializing in FHA loans, advises Casey Fleming, a seasoned mortgage originator and author. A knowledgeable broker can offer insights into approval criteria and strategies. They may also have access to lenders who operate indirectly through intermediaries like themselves.
Given the challenge of eliminating ongoing mortgage insurance premiums on FHA loans, it’s prudent to evaluate the long-term expenses of FHA loans versus conventional loans. Look for a mortgage lender equipped to assist in this comparison.
Tips for finding the best FHA lender
Apart from being equipped with the right inquiries for prospective lenders, consider the following tips to pinpoint the ideal FHA lender tailored to your requirements.
Know your credit score
Before you apply for an FHA loan, it’s essential to know your credit score. Your score might surprise you, potentially qualifying you for a conventional mortgage. However, if your score is particularly low, your lender options could be limited. While the minimum credit score for FHA loan approval is 500, some lenders may require a higher score, possibly 580 or even 620. If your score falls between 500 and 579, requiring at least a 10 percent down payment, consider improving your credit before applying if you lack the necessary cash on hand.
Understand how closing costs work
FHA-approved lenders are restricted from charging more than 2 to 6 percent of the loan amount in closing costs. Additionally, the FHA permits sellers, home builders, and lenders to contribute towards certain closing expenses, such as appraisal fees or title searches, up to 6 percent of the total costs. However, if the lender opts to roll these costs into your loan amount, you may face a higher interest rate and increased loan balance.
Within three days of applying for your FHA loan, you’ll receive a loan estimate detailing the charges. Check the “Closing cost details” section for “Origination charges” to understand the lender’s fees, which can vary and may be negotiable.
If you anticipate needing assistance, consider exploring down payment aid or support with closing expenses. Various state and local mortgage programs can complement an FHA loan, helping cover some of the upfront home purchase costs.
Know your APR
Lastly, it’s essential to consider the impact of the APR, or annual percentage rate, for which you qualify. Remember, there’s a distinction between the interest rate and APR. While it might be assumed that all FHA loans have the same APR, this isn’t the case.
“The FHA doesn’t dictate interest rates or fees,” explains Fleming. “Each lender can establish their own rates, leading to considerable variance between lenders.”
You can locate the interest rate charged by the lender on the first page of your loan estimate under “Loan terms.” The APR can be found on the third page under “Comparisons.”
Utilizing Bankrate’s mortgage APR calculator can assist in evaluating the long-term expenses of your mortgage and how it compares to other offers.
Important considerations before getting an FHA loan
While securing a home with only a 3.5 percent down payment and a competitive interest rate might appear ideal, it’s essential to recognize that FHA loans, despite their favorable terms, come with certain drawbacks.
The most significant downside of FHA loans is the requirement for borrowers to pay mortgage insurance premiums (MIP). This includes an upfront MIP of 1.75 percent of the loan amount, payable at the loan’s inception. Additionally, there’s an annual MIP ranging from 0.45 percent to 1.05 percent, determined by factors such as the loan term, amount, and loan-to-value (LTV) ratio.
If the down payment is less than 10 percent, the annual MIP cannot be canceled and will be paid for the duration of the loan. However, with a down payment of 10 percent or more, borrowers can have the mortgage insurance removed after 11 years.
Another method to eliminate FHA mortgage insurance is refinancing the FHA loan into a conventional mortgage once at least 20 percent equity is attained in the property.
Furthermore, FHA loans have borrowing limits, with the 2024 thresholds set at $498,257 for a single-family home, and higher-cost areas capped at $1,149,825.