With an FHA loan, you could qualify for a mortgage with a lower credit score, as little as 3.5 percent down and a cap on closing costs. These tips can help you find the best FHA mortgage lender for you.
4 tips to find the best FHA mortgage lender
- 1. Shop multiple FHA lenders.
- 2. Know your credit score.
- 3. Understand how closing costs work.
- 4. Know your APR.
1. Shop multiple FHA lenders
FHA-approved lenders, not the federal government, offer FHA loans, and each lender has their own FHA loan rates and fees, which is why it’s so important to shop around. Plus, some lenders have more lenient qualification requirements than others.
Compare your all-in FHA mortgage costs with at least three top lenders. Your favorite bank or credit union might already be an FHA-approved lender already, so check there first.
It might be helpful to enlist a mortgage broker who specializes in FHA loans, says Casey Fleming, a Silicon Valley mortgage advisor and author of “The Loan Guide: How to Get the Best Possible Mortgage.” A broker will be in the best position to offer meaningful and accurate advice that can guide both your short-term and long-term homeownership goals.
Because you can never eliminate the ongoing mortgage insurance premiums on FHA loans, also consider a mortgage lender who can help you compare the long-term costs of FHA loans versus conventional loans.
When shopping around for the best FHA mortgage lenders, ask:
- Which FHA loan is best for my needs? There are almost a dozen different FHA loan programs. Your lender should be able to tell you which options will be best for you and the pros and cons of each.
- Is there a rate lock available, how long is it and is there a fee? Many lenders let you lock in your interest rate for a set period while you’re shopping for a home. This can make the cost of your mortgage more predictable.
- Are there any penalties or fees to be aware of? Some lenders charge a prepayment penalty if you pay the loan off early or refinance. There could be other fees and penalties the lender imposes, too.
- How long does it typically take to close? If you’re on a tight timeline, you’ll want to find a lender who can close quickly or on your schedule.
- What are the upfront costs? Ask your lender what closing costs you’ll have to pay, and whether you’ll need to pay for mortgage points to attain the rate you were quoted.
2. Know your credit score
It’s crucial to know your credit score before you apply for an FHA loan. For one, your score might be better than you think — even good enough for you to qualify for a conventional mortgage.
Keep in mind that if your credit score is especially low, your lender options will likely be limited. While the hard cutoff for approval of an FHA loan is a credit score of 500, Fleming says some lenders won’t work with you if your credit score is below 580. You’ll need to put 10 percent down on your loan if your credit score is below 580, whereas the down payment requirement is only 3.5 percent if your score is higher than that.
If your credit score is in the murky area between 500 and 579 where you’ll be required to put at least 10 percent down, you might need to improve your credit before you apply if you don’t have that much cash on hand.
3. Understand how closing costs work
The U.S. Department of Housing and Urban Development (HUD) oversees the FHA program and caps closing costs at 3 percent to 5 percent of the loan amount. The FHA also allows sellers and home builders to pay some of your closing costs. If the lender is rolling the closing costs into your loan amount, which is another possibility, you’ll likely pay a higher interest rate and have a higher loan balance.
Within three days after applying for your FHA loan, you’ll receive a loan estimate. To find how much the lender is charging, look under the “Closing cost details” section at “Origination charges.” These fees differ by lender and might be negotiable.
If you think you’ll need help, keep in mind you could qualify for down payment assistance or help with closing costs. There are also state and local mortgage programs that can be paired with an FHA loan to help you cover some of the upfront costs.
4. Know your APR
Finally, don’t forget to measure the impact of the APR, or annual percentage rate, you qualify for. Remember, there’s a difference between interest rate and APR. It’s easy to assume FHA loans would all have the same APR, but this couldn’t be further from the truth.
“The FHA doesn’t set interest rates or fees,” says Fleming. “Each lender can set their own, so there can be quite a lot of variance between lenders.”
You’ll find the interest rate the lender is charging on the front page of your loan estimate under “Loan terms.” The APR is on the third page under “Comparisons.”
Bankrate’s mortgage APR calculator can help you determine the long-term costs of your mortgage and how it might stack up to other offers.
FHA loan drawbacks and limitations
Buying a home with only 3.5 percent down and a competitive interest rate might seem like a dream come true, but it’s important to note these loans have some downsides.
The most notable drawback of FHA loans is that they require the borrower to pay mortgage insurance premiums (MIP). There’s an upfront MIP of 1.75 percent of the loan amount, which is paid when you get the loan. Then there’s an annual MIP that varies from 0.45 percent to 1.05 percent, depending on the loan term, loan amount and the loan-to-value (LTV) ratio.
If you put down less than 10 percent, you won’t be able to cancel annual MIP, as you could with a conventional loan. If you put more than 10 percent down on an FHA loan, however, you can have the insurance cancelled after 11 years, says Stacey Elshehaby, processing manager of Silver Fin Capital Group based in Great Neck, New York.
Another way to remove FHA mortgage insurance is to refinance your FHA loan into a conventional mortgage when you have at least 20 percent equity in your home.
FHA loans aren’t right for everyone, but they can work well for borrowers who have shaky credit profiles and limited funds to get into a home. The best way to find out if an FHA loan is right for you is to shop around with FHA-approved lenders to learn about your options. FHA lenders can look at your income, credit and overall goals to see what type of loan best suits your needs.