FHA loans have become a very popular type of mortgage due to their low down payment and credit score requirements.
But not all FHA loans are great deals.
Closing costs and the interest rate are key factors in determining whether or not you’re actually getting a good deal on an FHA loan.
In this article, we’re going to explain how you can make sure you’re getting the best deal on your home loan.
What is an FHA Loan?
The Federal Housing Administration was created in 1934 to increase homeownership in America. Before FHA loans came about borrowers needed to have flawless credit and great income to qualify for a mortgage.
The FHA does not offer home loans directly, they will insure the loan, so in the event, the homeowner defaults on the loan the lender is reimbursed.
FHA Loan Requirements
2020 FHA Loan Requirements
• 580 credit score with 3.5% down
• 500-579 score with 10% down
• Maximum 50% debt-to-income ratio
• Two years of stable employment and income history
• For primary residence only
• 24 month waiting period after a foreclosure or bankruptcy
• 1% of student loan debt added to DTI ratio
How to Get the Best Deal on an FHA Loan
1. Improve your credit score
Your credit rating will largely determine the interest rate you receive on a loan. Even a quarter of a percent difference in your interest rate can add up to tens of thousands of dollars over the course of a mortgage loan.
Before applying for an FHA loan you should take some time to work on increasing your credit score. Things, like paying down credit card balances and disputing incorrect information, are just some of the steps you can take.
What to do
- Pay down your credit card balances
- Dispute inaccurate and negative information on your credit profile
- Stay current on all of your bills
- Avoid opening new loans before applying
- Limit the number of credit inquiries
For more tips read our article on how to improve your credit score quickly.
2. Compare Loan Estimates from Multiple Lenders
Before you decide on a mortgage lender they will provide a loan estimate that details the costs associated with the loan. The interest rate and all closing costs will be broken down in the estimate.
Don’t make the mistake of getting a loan with the first lender that pre-approves you. Different lenders will give you varying interest rates and charge different fees.
You should get loan quotes from a minimum of 3 different lenders before choosing a mortgage company.
3. Negotiate the Rate and Fees
Like anything else, you can negotiate your interest rate and closing costs. This is where the loan estimates from other lenders will help you negotiate a better deal.
Some lenders will charge for things like a copy of your credit report or charges for a courier, these fees can usually be waived as long as you ask.
FHA loans are perfect for first-time homebuyers because of their low credit and down payment requirements.
If you have at least a 580 credit score you can qualify with just a 3.5% down payment.
But not all FHA loans are created equal, the interest rate and closing costs will determine if you’re actually getting a good deal, or not.
3 things to do to get the best deal on your loan.
- Improve your credit score before applying
- Compare loan estimates from at least 3 different lenders
- Negotiate the interest rate and closing costs down
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