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Understanding Mortgages

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How to get an FHA mortgage: A guide for homebuyers

Whether in the city, suburbs or perhaps someplace more rural, owning a home is something virtually everyone sees themselves doing at some point. But when you have a family to support, are on your own for the first time or simply don't have enough saved to use toward a down payment, circumstances of the moment can make homeownership seem like a pipe dream.

An FHA mortgage can help bridge the gap so you can live out your aspirations. Backed by the Federal Housing Administration, FHA loans are available through most mortgage providers and are ideal for individuals who have steady income, but may lack certain other financials that are asked for when filling out a loan application. For example, if your credit score is less than perfect or you can't afford a 20 percent down payment toward a property's purchase price, a loan from an FHA lender can make a lot of sense.

That said, there are a few key aspects that must be fleshed out in order to qualify for an FHA loan. Here, we'll address these elements, as well as a few other important considerations so you can qualify for an FHA on the first try.

How does an FHA mortgage compare to a conventional mortgage?

FHA loans are a lot like conventional loans, in that you can buy them with fixed-rate or adjustable-rate interest - typically in 15-year and 30-year increments - and require an initial down payment, among other similarities. However, the approval process isn't as stringent for an FHA mortgage versus a traditional loan product. For example, instead of a 20 percent down payment, you can put as little as 3 percent down, which is slightly less than what the average is these days (5 percent), according to the National Association of Realtors.

What you spend in interest is largely determined by your credit history, meaning how reliable you are at making your payment on time. Here as well, FHA loans have looser credit restrictions than conventional mortgages. Generally speaking, FHA loans require a minimum credit score to be close to 600.

However, should your down payment be larger - say 10 percent or 15 percent - you may be approved with a FICO® score that's a bit lower. It's worth noting that any down payment that's less than 20 percent requires the purchase of mortgage insurance, which we'll discuss a bit further later on.

Another key distinction FHA loans have versus conventional loans are interest rates. FHA rates are typically lower than conforming loans. But again, your creditworthiness - among other financial characteristics - will factor in to how much you can expect to spend in interest, which is also influenced by market dynamics that are almost constantly in flux.

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What should my debt-to-income ratio be?

You've probably heard about debt-to-income ratio, but if you're new to homeownership, you may not be exactly sure what it means. It's pretty straightforward: It basically is an assessment of how much of your gross income goes toward monthly payment expenses. You can calculate this through the use of mortgage calculators, but you can also do it on your own by simply dividing the totality of your monthly debt payments (i.e. installment and revolving, not including household utilities) by what you earn in the typical month, before taxes are taken out. Multiplying the answer by 100 will give you a percentage, which is your DTI.

In order to be approved for an FHA loan, the DTI should be no higher than 43 percent, which is an indication that less than half of your monthly earnings are put toward existing expenses. The lower your DTI, the more likely it is you'll be approved, with the ideal ratio being between 28 percent and 36 percent. However, it's important to emphasize that no single factor will be the deciding one as to whether you'll be given the green light. Lenders take into account the totality of your financial and employment situation.

What's the deal about mortgage insurance?

Although there are exceptions, such as with VA loans, mortgage insurance is typically required on any loan where the down payment is less than 20 percent of the purchase price. This rule applies to FHA loans, regardless of how much money you use toward the upfront cost. Mortgage insurance is included in your monthly mortgage payment. FHA requires mortgage insurance for the life of the loan unless you are able to refinance due to an increase in equity.

What else should I know about FHA loans?

Perhaps the best aspect of loans backed by the FHA is they offer a tremendous amount of flexibility. For example, say that you're able to put 3 to 5 percent toward the down payment of a home, but you'd like to put more money toward the cost so you can pay off your mortgage more quickly. If you've received gift money from a parent or, close friend or relative, you can use these funds so you can pay off a bigger chunk. These gift funds can be used in conjunction with what you spend or can cover the cost in its entirety.

Lastly, you may be wondering the maximum loan amount you can be approved for with an FHA mortgage. The amounts have changed from year to year, and in 2019, the ceiling rose to $726,525, HousingWire reported. That's up from $679,650 in 2018. With the median value for a property among all housing types nearing $250,000, according to the most recent estimates from the NAR, the new maximum loan amount is certainly sufficient to cover the cost of the majority of houses up for sale.

Homeownership is the American dream. The flexibility and payment options available with an FHA loan can help turn those dreams into reality. With the home buying season rapidly approaching, getting in touch with your favorite loan officer to learn more, and let the search begin!


Understanding Mortgages

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First-time home buyer loan programs: What are the options?

No matter where you are in life - a recent college grad, newlywed or just someone who is finally ready to make the leap - first-time homeownership is a big decision. According to the National Association of Realtors (NAR), roughly 33% of the market is composed of first-timers, a share that's remained fairly consistent over the past several years. That's a significant figure and it's understandable, given that buying a house is something that most people hope to accomplish at some point.

Regardless of your situation, you probably have lots of questions which, stacked on top of one another, might rival the height of a skyscraper: How much can I afford? Should I live in the country or the city? What is the application process like? Who are the mortgage lenders and which should I choose? What will my interest rate be? Are there any assistance programs available? You get the picture - and that's just a few of the burning questions first-time buyers may ponder. 

Here's the good news: As numerous as your questions may be, almost equally as abundant are your options, particularly when it comes to loan programs. So, which one should you choose? Here are the details on a few of them that can help guide your decision:

FHA Loans

Backed by the Federal Housing Administration, FHA loans are among the more popular options, particularly for first-time buyers. The reason for this is the qualification standards are a bit looser compared to others. Although the FHA operates the program, FHA loans are sold through private lenders.

Perhaps the most attractive aspect of FHA loans, aside from their wide availability, is the fact that many people are eligible. For example, even if your credit score is lower than what's considered ideal, that isn't always a deal breaker. Furthermore, you're not expected to come up with a sizeable down payment, as this can be as low as 3.5% of the purchase price.

USDA-RD Loans

Another government-backed mortgage option is the program run by the U.S. Department of Agriculture. Similar to FHA loans, USDA-RD loans are sold through private lenders and are geared toward homebuyers whose incomes are considered low to moderate. You fall into this bracket if your combined household income is between 50% and 80% of the median salary in your geographic area, as defined by the Department of Housing and Urban Development.

They're a loan type ideal for first-time buyers, but USDA-RD loans are exclusively for those who live in rural parts of the U.S. What defines "rural"? There's actually no official definition, but generally speaking, according to the Census Bureau, it's any place that is not considered a metropolitan statistical area (MSA). From a geographical perspective, MSAs are the exception, not the rule, so even if you don't think you live in a rural enclave, don't discount your eligibility. Why? Because 97% of the U.S. populace resides in a location the USDA-RD loan program covers.

Here's another attractive aspect of USDA-RD loans: a down payment is optional. Surveys by the NAR show that the down payment is often the biggest obstacle for prospective buyers; USDA-RD loans help make homeownership possible. That said, there are a few prerequisites in order to be considered eligible. Your FICO® score (that's your credit score) and household income must meet a certain total, depending on the size of your family. The more there are of you, the more you're able to earn.

Keep in mind that even though you're not required to make a down payment with a USDA-RD loan, you are expected to purchase mortgage insurance. Even here, though, premiums tend to be more affordable compared to traditional loan products.

Conventional 3% Down

Otherwise referred to as a conventional 97 LTV (loan-to-value) mortgage, the 3% down loan program is aptly named, because it's custom-made for individuals who may not be able to afford a large lump sum going toward the down payment. Developed by Fannie Mae and Freddie Mac, the conventional 97 program requires an upfront expense of just 3% of the home's value, which is lower than the mandatory amount for FHA loans. As noted on Fannie Mae's website, there are a few other eligibility standards to be mindful about. It's for fixed-rate mortgages only, as opposed to adjustable rate mortgages, and the requested loan amount can't be higher than $484,350. Additionally, while repeat buyers are free to apply, it has to have been at least three years since you last were a homeowner.

VA Loans

If you're an active or retired member of the military, you may be uniquely qualified to apply for an affordable mortgage product thanks to the Veterans Administration. VA loans are backed by this government department but sold through most private lenders. As with USDA-RD loans, they do not necessitate a down payment. VA loans are available to individuals who serve or have served in any of the five military branches - Army, Navy, Air Force, Marines, Coast Guard - or reserves, for a period of at least 90 days at wartime or 181 during peace. Closing costs and monthly payments tend to be more affordable with VA loans as well.

What type of loan is the best option for a first-time buyer?

Given that there are so many mortgage options to select from, you may wonder which is the very best. When it comes down to it, there's no one-size-fits-all answer. Everybody's situation is different and not only that, participating lenders vary. Assistance programs aren't universally available either. That's why it's so important to consult with a mortgage professional who is well-positioned to assess your specific situation and go from there.

Armed with this information, you can enter the market with a better idea of what loan to go with and what you can expect as far as qualification is concerned. Contact your local RMS loan officer for a free consultation.


Understanding Mortgages

Young couple meeting with a loan officer

How first-time home buyers can secure a mortgage

First-time home buyers represent a substantial portion of the property seeking public. Accounting for roughly one-third of sales at any given point in the typical year, according to the National Association of Realtors, every first-time home buyer enters the market with the hopes of realizing the American dream - ideally at an affordable price.

But buying a home on a budget may seem easier said than done. Fortunately, there are a variety of opportunities that you can take advantage of to buy a home you've set your sights on.

What do you need when applying for a mortgage?

After you've taken a look at some of the listings in your area and seen what the prices are, you'll need a mortgage provider so you can apply for a loan. Lenders are quite plentiful, so you'll have plenty of options to choose from. Whoever you go with, they'll need to see some information to determine your financials. Some of the items to gather include your credit report, pay stubs from the last few weeks, a bank statement of available funds and a copy of your federal tax returns.

Your lender will pull a credit report. Your credit report, which you can also obtain from any of the three credit bureaus for free, offers a window into your payment history. They'll be looking to see if you take care of bills on time as well as if you have any debt. The higher your score, the more likely it is you'll be approved. Generally speaking, a FICO score of 740 or above is the ideal. Borrowers are approved with lower scores, but chances are greater that you'll get a lower mortgage rate with a strong score.

Is there a program for first-time home buyers?

Would-be buyers - regardless of whether they're first-time or not - come to the process with unique needs. Understanding this, there are many mortgage options to choose from. One of the more popular types for first-time buyers - including low-income families - are FHA loans. Backed by the Federal Housing Administration, FHA loans are often ideal if you're a new buyer because down payment requirements are lower.

For example, borrowers for other loan programs and products may need to spend 20 percent of the home's value as the down payment, as may be the case for a jumbo loan. Not so with FHA loans. Down payments as low as 3.5 percent are available. Additionally, FHA loans can be worthwhile to people with less-than-sterling credit.

Of course, conventional mortgage loans shouldn't be overlooked. There are conventional loan programs that allow for down payments as low as 3 percent.

Another option are VA mortgage loans. The Veterans Administration issues these through private lenders and as their name suggests, they're exclusively for active and former members of the armed services. Applicants don't need to come up with a down payment, nor do they need private mortgage insurance. Typically, mortgage insurance is necessary when down payments are less than 20 percent.

The path to homeownership is paved with possibilities. Getting your finances in order and understanding some of the terminology - such as loan-to-value ratio and debt-to-income ratio - can help you reach a successful destination. Your mortgage lender can help you understand this kind of terminology.

 

There are even more first-time home buyer options available than mentioned above, and great tools to help you discover what kind of mortgage program is going to work best for you. Reach out to your favorite loan officer today to ask your questions and get started!

 


Understanding Mortgages

House on a pie chart

What does “escrow” have to do with my mortgage payments?

“What does it mean when my mortgage lender says my mortgage is going to have an escrow?”

Your mortgage lender is referring to the account that will use a portion of your monthly mortgage payments to pay your property taxes, homeowners’ insurance, and if applicable, private mortgage insurance.

A little while back, we examined the meaning of “escrow” in the context of earnest money deposits and settlement funds. An escrow account is a third-party account that holds money safely and distributes it to the right place at the right time. That can also apply to money you need to earmark for taxes, insurance, and any other managed expenses after you have bought your house.

In the case of the escrow account attached to your mortgage, the payment you make each month gets separated out. The principle and interest owed to your mortgage servicer is paid right away while the amount set aside for taxes, homeowners’ insurance and mortgage insurance (if applicable) waits in your escrow account. When it comes time to pay these bills, that amount has been accounted for, and is paid directly from your escrow account.

What if too much or too little was set aside?

Each year, your escrow account is reviewed for overages or shortages and a new estimation is set for what you’ll need for the next year. If an overage is found, the excess money is sent back to you. If a shortage is found, your mortgage servicer lets you know and typically gives you the option of paying the difference or raising your monthly payment over the next year to compensate.

Can I get a mortgage without an escrow account?

Yes. And this may be where the myth about a home buyer having to hand over a 20% down payment was born. In general, for instance, if you’re looking at a conventional mortgage loan, the mortgage lender is going to require an escrow account if you borrow more than 80% of the property’s worth. From a lender’s perspective, an escrow account is good sense. Everything gets paid accurately and on time.

Other mortgage programs have their rules about escrow and down payment sizes, so it’s always a good idea to take questions about this to your trusted mortgage loan officer. There can be pros and cons, if you’re weighing whether using an escrow account with your mortgage makes sense for you, so you’re going to want to bring all the facts of your situation when you seek guidance. A loan officer is going to be familiar with the mortgage products available to you, and will be able to educate you on what that means for you specifically.

If you do get a mortgage without an escrow account, you’re going to want to make sure to pay your property taxes, insurance, etc. on time. Failure to do so can jeopardize your ownership of that property.

The next time you’re talking with your mortgage lender, and they refer to your escrow account, you can nod sagely and say with full confidence, “I understand.”

Now get out there and find the home of your dreams.


Understanding Mortgages

Mortgage rates are up. Here's why buyers shouldn't worry.

Mortgage Rates are up: Here's why buyers shouldn't worry

If you've been thinking about buying a house over the last few years, you've probably noticed something about mortgage rates: They're starting to rise.

According to the most recent data from Freddie Mac, 30-year fixed-rate home loans now average approximately 4.8 percent. That's up from around 4 percent back in January.

Fifteen-year FRMs, meanwhile, are following a similar path. In November 2018, they averaged 4.2 percent — nearly a full percentage point higher compared to when the year first began.

Given the climbing trend, this might suggest that it's a bad time to be in the market.

Deciding whether or not to buy is a personal decision that needs to be made in consultation with your loved ones and real estate agent. But if the direction of mortgage rates is serving as your barometer, some historical perspective may be in order.

Mortgage rates are a lot like the temperatures: They rise and fall over time. Similarly, they're influenced by multiple factors. For rates, they can include the pace of home buying, how the economy is functioning and actions taken by the Federal Reserve.

Mortgage rates were exorbitant in the 1980s

With 30-year fixed rate mortgages up from around 3.6 percent in 2012, it would seem that affordability conditions are worsening. However, if you go back to 1980, mortgage rates were much higher — considerably so, in fact.

Case in point: In 1982, borrowers paid approximately 16.9 percent (you read that right) on a 30-year fixed loan, according to archived data from Freddie Mac. That's more than three times higher compared to where rates stand today.

Real estate expert Kris Lindahl told KARE-TV that context is crucial regarding home loans and when a prospective buyer tries to determine when rates are deemed affordable.

"Historically, rates are still really low," Lindahl explained.

Lindahl added that millennials seem to be particularly cognizant of this fact, given that many are opting to buy higher-priced homes instead of entry-level houses "because they want to lock in that lower interest rate for the life of their loan."

Homeownership is gaining ground

It's these same 18- to 35-year-olds who are fueling robust growth in homeownership.

Using data from the U.S. Census Bureau, The Wall Street Journal reported that the share of Americans who own a residence reached 64.4 percent in the third quarter. However, among millennials, in particular, the homeownership rate climbed to 37 percent — a strong uptick from 2017, when long-term fixed mortgage rates averaged 3.8 percent.

"The recovery is now at this point driven by first-time home buyers and not older generations," real estate expert and economist Skylar Olsen told the Journal.

Historically low mortgage rates have helped make homeownership possible for millions of Americans, and they're clearly taking advantage while they remain in affordable territory.

What does the future rate climate look like? In short, it pays to buy now. In Freddie Mac's most recent forecast, they're projected to average in the low-5-percent range in 2019 and likely to rise to the mid-5s come 2020.

Now may be as good a time as ever to take advantage of the cost-cutting environment while you still can. Having said that, even in 2020, should rates rise further, what you'll spend in interest is minimal compared to yesteryear.


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