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Friday 07/28/2017 Mortgage Rates

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FHA Loan Qualifications

The Federal Housing Administration (FHA) loans only qualify mortgagors that meet the following requirements:

  • Your down payment can be as little as 3.5% if you have a credit score of at least 580.
  • Your down payment can be a gift or a grant.
  • If you have a credit score of 500 and under, you can qualify if you meet all other FHA requirements.
  • If your credit score is within 500 and 579, your down payment has to be 10% and up.
  • The lower your down payment, the more you have to compensate with mortgage insurance premiums (MIP).

How MIP is Distributed

There are two instances in which you pay for mortgage insurance premiums:

  1. The upfront mortgage insurance premium (UFMIP) is 1.75% of the loan amount, which is rolled in with your down payment.
  2. The second, specifically the "annual" MIP, is paid in the form of monthly interest costs until the premium is paid in full. The size of the premium depends on the size of the loan and down payment.

The Loan-To-Value Ratio

The LTV ratio is a simplified way of relating the loan amount and down payment with the home's appraised value. This is done by dividing the mortgage amount with your home's appraised value. For example, if your house is worth $150,000 and the loan amount was $125,000, dividing them gives you: 125,000 ÷ 150,000 = 0.83 or 83%.

The LTV ratio is very useful when you get your first good faith estimate before sealing the deal on the mortgage. You can use the loan estimate and the value of your home to obtain the LTV.

Assuming the example LTV ratio used earlier is yours, let's look at how soon you can fulfill your mortgage insurance premium over the life of the loan. The table below includes examples of how long it takes to fulfill MIP obligations within loan terms of greater than and less than 15 years, depending on the LTV.

The bigger your down payment, the lower your LTV, the faster you can pay off a MIP imposed on your loan.

Example FHA Numbers
Loan Term Loan-To-Value (LTV) Ratio Duration of MIP
 Less than or equal to 15 years   Less than or equal to 78%  11 years
 Less than or equal to 15 years  79 - 89%  11 years
 Less than or equal to 15 years  Greater than or equal to 90%   Life of loan
 Greater than 15 years  Less than or equal to 78%  11 years
 Greater than 15 years  79 - 89%  11 years
 Greater than 15 years  Greater than or equal to 90%  Life of loan

 

Now that you know how to plan effectively for your MIP obligations of your FHA loan, make a larger down payment, build your home equity, and gain full ownership of your home little by little.

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