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FHA mortgage loans allow many people to qualify for mortgage loans each and every year. These are home buyers who may not qualify for conventional loans or other specialized loan programs like USDA loans and VA loans. An FHA loan backed by the Federal Housing Administration may be your best way to purchase a house or condo.
Important Facts About FHA Mortgage Loans
One very important aspect of FHA loans is the fact that you must use the loan to buy a property that will be used as your primary residence. FHA loans can’t be used to purchase vacation homes or secondary investment properties. You may be able to qualify for an FHA loan on multi-family property, as long as you plan to live in one of the units as your personal residence. There will also be loan limits on FHA loans, meaning there is a maximum amount you can borrow. These limits change every year, and will vary from region to region based on prevailing home values in any given housing market. More expensive areas will generally have higher FHA loan limits.
If you are applying for an FHA loan, you will want to do everything you can to qualify for the lowest possible mortgage rate. Your fixed mortgage rate will be applied to the entire 30-year term of the home loan. It will impact your monthly mortgage payment. A lower interest rate can reduce your monthly payment amount while also decreasing how much interest you pay over the life of the home loan.
So, how do you qualify for a lower FHA mortgage rate? Here are some of the most important steps you should be taking before you apply:
Raise Your Credit Score
Your credit rating (aka FICO score) will play a significant part in determining your qualified FHA mortgage rate. It is not the only factor considered by the mortgage lender, but it is a very important measurement of your financial health and your ability to keep up with loan payments. A high credit score shows you are good at making on-time monthly bill and debt payments. You will generally need a credit score of at least 580 to qualify for an FHA loan with a minimum 3.5% down payment.
You may still be able to qualify for an FHA loan with a lower FICO score or if you haven’t established much of a credit rating yet. You may be required to make a larger down payment or prove that your other financial indicators are very strong.
Pay Down Other Debts
A mortgage loan is a very large amount of money. Thus, it is a significant amount of debt for which you will be responsible. Mortgage lenders are less likely to take risks on borrowers who already have a lot of other debts under their names. This is especially true if these are high-interest debts like credit cards and personal loans. Car loans and student loans are more common and understandable, but will also be factored in when the lender calculates your debt-to-income (DTI) ratio.
DTI represents your average monthly debt payments divided by your average monthly pre-tax income. For FHA home loans, lenders are generally looking for a DTI of 43% or less. Lowering your debt will help you qualify for a lower mortgage rate.
Save Up Your Cash
The more cash you can save up for your down payment, the better off you will be as an FHA loan applicant. You can qualify for an FHA mortgage loan with a minimum 3.5% down payment. This means you’ll pay cash upfront for at least 3.5% of the home’s purchase price plus all lending fees (i.e., the total mortgage loan amount). This is why FHA loans are so favorable for first-time home buyers and borrowers who don’t have a lot of cash saved up.
However, you should aim to save up as much money as you can for your down payment. A higher down payment will reduce your mortgage principal total, your monthly payment amounts and, usually, your mortgage rate. It can also decrease how much mortgage interest (PMI or MIP) that you will have to pay to secure the loan. Cash can also be applied to buy down mortgage points (aka “discount points”). Whether you use cash to buy points or use toward the down payment, you can potentially lower your mortgage rate. Talk with your lender about the best way(s) to utilize your upfront cash payment for an FHA loan.
Steady Your Income
An FHA loan can enable a lower-income home buyer to qualify for a mortgage loan when other lending options are unavailable. However, it always helps to have a steady job, strong employment history and consistent income. A healthy income and employment status can definitely help you qualify for a lower FHA mortgage rate.
To learn more about FHA mortgage loans in Atlanta and other ways to lower your mortgage rate as a home buyer, contact Moreira Team | MortgageRight today.