FHA loans: A low down payment home loan option for you

When trying to get a new home loan, many borrowers don't have enough money to meet the minimum down payment requirements imposed by some banks and mortgage lenders. Some lenders require you to put 20 percent down on a home loan, which means that you would need a $60,000 down payment to get a loan for a home that costs $300,000. If you have limited funds available for a down payment, then you may want to consider getting an FHA-insured loan, because some FHA loans only require you to come up with a down payment of 3.5 percent.

Keep in mind that when you get a loan with a small down payment, your monthly payments are often higher than those associated with a typical home loan, because you are borrowing more money when you put down a smaller down payment. You can use this loan payment calculator to figure out how your monthly mortgage payments will be affected by the amount of your down payment.

FHA home loan rates

Interest rates for FHA loans are usually very close to current home loan rates. For example, today you can find an FHA-insured loan that has a rate of 4.75 percent, which is historically very low and right in line with other available 30-year fixed-rate mortgages.

Some lenders such as Wells Fargo do offer FHA adjustable-rate mortgages (ARMs) that have an interest rate of around 3 percent for the first five years of the loan term, and then the rate can only increase by 1 percent per year, with a maximum total increase of 5 percent. There are several simple mortgage calculators available so that you can compare the different monthly payments required for both a fixed rate and an adjustable rate FHA loan.

Qualifying for an FHA loan

You can work with any FHA-approved lender when trying to qualify for an FHA loan. In general, you should expect that:

• Most lenders are going to review your credit score and require a documented work history that demonstrates you have verifiable income.
• Your debt-to-income ratio should be around 40 percent, which is calculated by dividing your new PITI mortgage payment and your other monthly liabilities by your gross income. For example, if your gross monthly income is $3,000, and your new monthly mortgage payment is $900, and you have $300 in other monthly liabilities:
  • Debts = $900 + $300 = $1,200
  • Divide $1,200 (debts) by $3,000 (income) = 0.40
  • Debt-to-income ratio = 0.40 x 100 = 40 percent.
• The house that you purchase will have to be inspected and an FHA-approved appraisal will have to be completed to establish the value of the property, which helps determine the maximum loan amount.
• The total amount of your loan will have to be less than the maximum FHA loan amount for your specific location.

The benefits of a low-down-payment FHA loan may be offset by the fact that you are going to be charged both an upfront fee and an annual fee for mortgage insurance, which is required for all FHA-insured loans. Currently, the upfront mortgage insurance premium is 1 percent of the loan amount, while the annual mortgage insurance premiums range from 0.85 to 0.9 percent, depending on the specifics of your FHA loan.