Nearly four out of 10 buyers who purchased a home in November of 2009 did so with the help of a mortgage loan insured by the Federal Housing Administration, or FHA. And in especially good news for buyers, FHA mortgage rates remained at historic lows as 2010 began.
According to financial Web site Bankrate.com, the average interest rate on a 30-year fixed-rate mortgage loan, including those insured by the FHA, stood at 5.04 percent in mid-February. Considering that just two years ago interest rates of 6 percent were considered outstanding, average rates just above 5 percent have to be considered historic.
Of course, that doesn't mean that there aren't challenges today when it comes to taking out mortgage loans. A total of 2.8 million U.S. households received foreclosure filings in 2009, according to online foreclosure company RealtyTrac.com. That's a record number. And many of these foreclosures are the result of bad mortgage loans passed out by lenders to borrowers with shaky credit histories and high levels of debt.
Because of this, mortgage lenders are more cautious when doling out mortgage money. Not only must borrowers boast strong credit scores, they must also pay higher down payments. Most conventional mortgage loans require borrowers to come up with down payments of at least 20 percent of a home's purchase price. This is a significant chunk of money for many home buyers to come up with. Consider that a down payment of 20 percent of a home with a purchase price of $200,000 would be $40,000, and it becomes easy to see that a down payment could become the toughest hurdle for buyers to overcome in their efforts to purchase a home.
This is why FHA-insured mortgage loans have become so popular. FHA loans require down payments of just 3-and-a-half percent of a home's purchase price. This means that the buyers of that $200,000 house would have to come up with a down payment of just $7,000, a far more attainable figure. FHA loans also are approved quickly these days; gone are the days when gaining approval for an FHA loan took months. Today, lenders are able to approve these government-insured loans in days.
FHA mortgage rates hew closely to the mortgage rates on traditional home loans. If the average interest rate on a 30-year fixed-rate mortgage stands at 5.4 percent, you can figure that the average FHA mortgage rate is nearly the same. This makes these loans even more attractive.
Another positive of FHA loans is that it is relatively easy for borrowers to qualify for them. Traditional mortgage lenders, remember, are still skittish about the country's soaring rate of housing foreclosures. Because of this, they are requiring that most borrowers have credit scores of 620 or higher to qualify for their mortgage loans. Borrowers must have scores of 720 or higher to qualify for the top interest rates from these private lenders.
FHA loans, though, are often approved for borrowers whose credit scores fall as low as 580. And even borrowers with middling scores will qualify for low FHA mortgage rates. FHA-insured loans are designed to help a greater number of potential buyers achieve their dream of owning a home. The low interest rates, smaller down payment figures and greater leniency when it comes to credit scores are all strategies that the FHA uses to help boost the country's home ownership rate.
To take advantage of the low rates and less-stringent requirements of FHA loans requires a bit of shopping on the part of consumers. Taking out an FHA loan, in fact, requires the same process and research that consumers put into applying for conventional mortgage financing. This means that it's essential for consumers to shop around at several mortgage lenders or banks to find the lowest interest rates and origination fees.
These fees will vary widely depending on the bank or lender. Fortunately, it's easier than ever for consumers to shop for the best FHA mortgage rates. They can run simple Internet searches at local and national banks and lenders to determine their average interest rates and closing and origination fees. Most banks and lenders readily share this information today; those that don't might find it difficult to attract the greatest number of potential home buyers.
There is one extra step in applying for an FHA loan: Consumers must make sure that any lender with which they decide to work is actually licensed by the FHA to give out FHA-insured mortgage loans. Fortunately, the vast majority of mortgage lenders today do work with the FHA. The reason is a simple one: FHA loans are increasing in popularity thanks to their low down payment requirements. Lenders and banks that don't work with the administration will again find themselves missing out on a significant number of potential clients. In today's difficult economy, no lending institution wants to turn away potential business.
Once consumers have found a lender or bank that deals with FHA-insured mortgage loans, they then have to begin the loan-application process. This can be a complicated, lengthy process. But this is the case whether consumers are taking out conventional mortgage loans or FHA loans.
To start the process, borrowers will send their lending institution copies of their last two federal income tax returns, last two paychecks, bank savings and checking account statements, other loan statements and credit-card bills. Lenders will study these papers to make sure that borrowers' monthly debt obligations, including their estimated new mortgage payments, are less than 36 percent of their gross monthly income.
Lenders will then run a credit check on borrowers. Lenders rely on three-digit credit, or FICO, scores to determine not only who qualifies for an FHA loan but at what interest rates. The better the FICO score, the lower the interest rates consumers will pay. FICO scores are impacted by several factors. In general, borrowers with a history of paying their bills on time and with a low amount of revolving debt will have strong credit scores. Those who frequently forget to send in their car-loan payments will have weaker scores.
Once a lender approves a borrower's loan application, the borrower will have to sign what may seem like a mountain of paperwork that makes the loan official. Borrowers will also have to pay any closing and origination fees at this time. These fees might include title insurance, document-prep, origination and appraisal fees.
Taking out a mortgage loan, whether it be insured by the FHA or a convention loan, is never an easy process. But by taking out an FHA loan, and by doing their research before doing so, borrowers will increase their odds of finding the right mortgage product for them. And thanks to the record-low FHA mortgage rates of today, borrowers will have spend less than ever to borrow this money.