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FHA Loans: 5 Financial Facts You Should Know

By Barbara Marquand
Mortgage Credit Problems Columnist


FHA loans are probably your best option if you're a home buyer with limited cash to put down or less-than-ideal credit.

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Here are the five financial facts you should know about FHA mortgages.

1. FHA Loan Interest Rate

The Federal Housing Administration guarantees FHA mortgages to reduce risk for lenders, making them more willing to work with buyers who don't have a lot of cash or perfect credit histories. But the FHA does not set or regulate interest rates, so mortgage rates vary among lenders. Shop among several FHA-approved lenders to get the best rate. You can enter your information on this page to get FHA loan quotes.

2. Down Payment for FHA Loans

An FHA mortgage requires just 3.5 percent down in most cases. You can't find less restrictive down payment requirements unless you can qualify for a Veteran's Administration or USDA rural housing loan. The exception to the 3.5 percent rule kicks in if your credit score falls below 580. Then you must put down 10 percent, but many lenders won't qualify you for a loan, period, if your score is under 620 in today's market.

3. FHA Loan Insurance Premium

The FHA guarantee isn't free. You pay both an upfront insurance premium and an annual premium. The upfront premium is 2.25 percent of the loan amount and can be financed as part of the loan -- you don't have to cough up the cash on the spot. The annual premium for a 30-year fixed-rate mortgage is .5 percent of the loan amount for a loan-to-value ratio of 95 percent or .55 percent for a loan-to-value ratio above 95 percent. You pay one-twelfth of the annual premium each month as part of your mortgage payment.

4. Closing Costs

Closing costs add up to a few thousand dollars, no matter what type of mortgage you get. New rules further limit how much sellers can contribute to closing costs for FHA loans. The current cap is 3 percent, versus the previous 6 percent of the home's price. Closing costs can be financed as part of the loan.

5. Loan Limits

Your mortgage must fall within loan limits set by the Federal Housing Administration. The limits vary by housing market, with higher limits for more expensive areas. Go to the FHA Web site to look up the FHA loan limits for your county.

Although FHA loans are easier to get than conventional loans, qualifying isn't a cinch. Save as much as you can toward a down payment, pay down credit card debt, and catch up on any late payments to improve your chances and get offered better rates.

Sources

http://www.fhaoutreach.gov/ / http://portal.hud.gov

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