FHA Loans
The Federal Housing Administration (FHA) is a government agency that offers mortgage loans through approved lenders. Roughly 10 percent of home loans are FHA mortgages. FHA mortgages appeal to
Guidelines
Since the FHA guarantees the loan for the lender, the agency sets the guidelines to qualify for a loan. Some of these are
Loan Limits
The FHA limits the amount of money you can borrow for a home in each of North Carolina’s counties. For example,
- Chatham, Durham, and Orange Counties: $506,000
- Alamance, Brunswick, Cumberland, and Wake: $420,680
If you are interested in county loan limits, please check with Housing and Urban Development.
These limits are pretty generous. Even conventional loans limit what buyers can borrow. Note that you can borrow about $80,000 more if purchasing in Chatham, Durham, or Orange counties. That’s because the median home price in those counties is higher. FHA is required by law to set single family loan limits at 115 percent of area median house prices. FHA calculates mortgage limits by Metropolitan Statistical Area (MSA) and county.
No Down Payment
One lender we use has a no down payment option. The FHA 100 percent program is designed to make it easier for individuals and families with low to moderate incomes buy a home. This program offers 100 percent financing, which means borrowers don’t have to make a down payment. It combines two loans: a main loan covering 96.5 percent of the home’s cost and a second loan of up to 3.5 percent to help with the down payment or closing costs. There’s no income limit, and you don’t have to be a first-time homebuyer to qualify. Keep in mind there still may be costs to close the loan with an attorney. Give us a call to learn more about your options!
Mortgage Insurance
Mortgage insurance is separate from homeowner’s insurance. As a homeowner, you must purchase homeowner’s insurance to safeguard the house in case of damage. However, mortgage insurance protects the lender if you cannot repay the loan; it does not protect you if you cannot make your mortgage payment.
FHA has two mortgage insurance premiums,
The upfront premium you pay is 1.75 percent of the loan amount.
If you purchase a $200,000 home with 3.5 percent down, FHA will charge an insurance premium of 1.75 percent of the total loan amount, or $3,377. You could pay the $3,377 up front at your loan closing or you could roll the premium into your loan amount. This would make your new loan amount $203,377.
The annual premium depends on how much money you borrow, the size of your down payment, and the length of your mortgage term. If you can make a down payment of 10 percent or more it will lower your insurance premium and even cancel it after 11 years. Otherwise, you will pay this premium, prorated monthly, as long as you have an FHA loan. Typically, you have to refinance by obtaining a conventional loan to stop paying mortgage insurance. You can go to our Monthly Payment Calculator to see premiums based on the down payment amount.
No Payoff Penalty
You may pay off an FHA loan in whole or in part at any time without a penalty from the lender.
Steps to Getting an FHA Loan
When deciding how much you can borrow (and your co-borrower if you have a partner) all lenders review,
Your income, including your work history.
#1Your credit scores.
#2Your monthly payments (including credit cards, car loans, student loans, child support).
#3Your total house payment which includes Principal, Interest, Property Taxes, and Homeowner's Insurance (PITI). Your total house payment with an FHA loan also includes mortgage insurance.
#4Your Income
You share your two-year work history by providing
If you are self-employed, it is important that you have been so for the past two years. If you have been in the same line of work for the past two years and filed at least one tax return as a self-employed individual, you may be eligible. For a quick answer, send your personal and/or corporate tax returns to a lender, so they can calculate your income to see how much house you can afford.
If you recently graduated from college and started a new job, do not worry. Being a college student counts toward your two-year work history.
Your Credit Score
For a home loan, you need a tri-merge score or a residential mortgage credit report (RMCR). A tri-merge score includes the scores from the three largest credit-scoring agencies, Equifax, Experian, and Transunion. An RMCR is not free, but we do not charge up front for the RMCR. The RMCR includes three scores, and we use the middle score. There is additional information on your borrowing habits to help a lender decide how much you can borrow. The RMCR is a stricter look at your ability to repay a mortgage.
The higher the score, the better your interest rate. Advertised interest rates are just the typical rate for most borrowers. You will find that if you have a low score, the lender wants to charge a high rate, and if you have a high score, the lender wants your business and offers you a lower rate. As noted, you need a score of 620 or higher for a conventional mortgage.
Auto loans, credit card debt, and student loans are a good credit score indicator for lenders if you paid them on time. Late payments, on the other hand, lower your credit score.
Debt-to-Income Ratio
We compare how much money you owe to how much money you make, called a debt-to-income ratio (DTI).
Front DTI uses your house payment as a percentage of your gross monthly income. Gross income is the money you make before taxes are taken.
If your house payment is $1,000 and your gross monthly income is $4,000, your front DTI is 25 percent. The best borrower will have a front DTI that is 20 to 35 percent.
If you have other monthly payments like auto, credit card, student loans, or child support, lenders will count your Total DTI by taking your house payment plus the other monthly payments as a percentage of your gross monthly income.
If your house payment is $1,000 and your auto payment is $500, you have total monthly payments of $1,500. This is 37 percent total DTI based on gross monthly income of $4,000. The best borrower will have a total DTI that is 35 to 45 percent.
If you want to know your DTI
Contact Us
Total House Payment
PITI means principal, interest, taxes, and insurance. Your total house payment will include these.
The principal is the amount you borrow from a lender. The interest is the rate you pay the lender on top of the borrowed principal. While you agree to borrow a certain amount, or principal, you’re actually paying back the principal plus interest.
Property taxes are set by a city or county tax worker who decides the value of your home. Property values are updated about every four years, but tax rates can be adjusted annually. Most borrowers make property taxes part of the monthly mortgage payment, but you can pay them separately. Property values and tax rates are available online at city and county government sites.
All lenders require you to buy insurance for your home, called homeowner’s insurance. You pick the insurance policy, and the payment is added to your monthly payment.
Cash
We ask how much money you currently have in checking, savings, and other accounts. Unless you are buying new construction, you must pay the seller due diligence and earnest money along with your offer to purchase*. Your realtor will explain these items along with your offer to purchase. For your mortgage, you need money for a down payment and possibly to cover the cost to legally sign for the loan. Signing for the loan is also called closing the loan. Count on spending $3,000 to $7,500 for your closing costs.
*For more information on due diligence and earnest money, see First-Time Homebuyer.
The Three NOs!!!
Closing Costs
The last step to your mortgage loan is called closing the loan, or loan closing. You will visit an attorney to sign paperwork and pay fees. The fees you pay are called closing costs. This is what you can expect in general and not on every loan.
While there is no zero-cost mortgage, please note we are a small, independent business and can refer you to businesses that may save you money. It never hurts to ask what you’ll pay. You will want to know the costs for each of these before deciding who to work with on your home loan.
Closing costs are broken into three sections
- Lender Fees
- Third-Party Fees
- Prepaid Items
Lender Fees
- As a mortgage broker, we rarely charge origination fees on our loan products. The lenders we use pay our fee.
- Loan origination, points, commitment, and application fees may or may not be charged by other lenders. It is important to look at section A on page 2 of the loan estimate to determine how much you are paying in these fees for the interest rate offered. For example, a 3.75% rate with these fees may not be as good a deal as a 4% rate with none.
- $75 is a tax service fee
- $18 is for flood certification
- $65 to over $200 for credit reports depending on whether your credit is excellent or needs work.
Third-Party Fees for Closing Your Loan
A third party is anyone besides you and the lender. Some of these fees may be added to the amount you are borrowing. Third-party fees include:
- $950 and up for an attorney depending on the attorney you choose.
- Around $2.50 per $1,000 of the purchase price of the loan will cover title insurance.
- If your home is $250,000, then title insurance will cost about $625. Your attorney will do a title search to make sure there are no legal issues with the title or ownership of your home and also no tax liens or judgments against the sale of the home. The attorney will obtain title insurance that usually protects you and the lender from any title risks.
- $100 to the county government to record the legal documents.
- You do not need a home inspection to get a mortgage, but most buyers pay about $500 to a professional who will inspect the condition of the home and give you a home inspection report. This report is used to review any needed repairs with the seller.
- An appraiser must determine the fair market value of the house. Depending on the loan type and location of the home, the appraisal will cost about $550 to $800.
- $20 or less for a tax transcript.
Prepaid Items
At closing you prepay some items including
- Interim Interest. Interim interest covers the mortgage interest on the home loan from the day you sign for the loan until the end of the month.
- Escrow Account. Escrow is a legal term. It means your lender is holding your money in order to pay another party. Generally, your annual homeowner’s insurance and property tax bills are paid from your escrow account. Part of your monthly house payment will go into your escrow account, and the lender withdraws money from that account to pay your annual property tax and homeowner’s insurance bill. You receive an annual statement to show your balance. When you sell your house, any money left in this account is returned to you.
- Homeowner’s Insurance. You choose your insurance agent and homeowner’s insurance policy and pay the first year’s premium at closing. The lender also takes about two months of premium payments to go into your escrow account as savings toward the next year’s premium. When the premium is due the lender can pay the full amount out of the escrow account (see above).
- Other Costs to Close. There are other costs that you may have to assume depending on your particular financial situation and personal choices (see below).
Discount Points
Some borrowers pay points to discount the rate. Points lower your interest rate by paying more money up front. One point equals one percent of the loan amount. So, if the loan is $200,000 one point would cost you $2,000 at closing. Usually, one point at closing lowers your interest rate a quarter percent for the life of the loan.
Generally, points are a good deal if you plan to stay in the house for a long time and have the money. Points are a tax-deductible expense.
Closing Costs Others May Cover
In most cases, you can use a gift from a friend or relative for the down payment. Please contact a loan officer to discuss this option if you are considering a gift to close your mortgage.
Some buyers do not have enough cash on hand to cover the down payment or the cost of closing the loan. The seller may pay a portion of your closing costs but cannot pay any of your down payment.
Where Do I Find the Costs to Close?
- Try to get at least two quotes from mortgage lenders so you can compare their closing costs – as well as their interest rates.
- Review your Loan Estimate line by line as early as possible.
- The document that shows your actual costs to close is called a Closing Disclosure.
Loan Estimate
Read your Loan Estimate (LE). This form documents all of your closing costs, but it’s not the final word. Federal law requires mortgage lenders to provide borrowers with an LE of the closing costs within three days of submitting a loan application. The LE is your lender’s estimate of the final fees they’ll charge for originating your loan and shows if your interest rate is locked. These amounts will not change. The property taxes and homeowner’s insurance premium are estimates and may change.
Closing Disclosure
Read your Closing Disclosure (CD). This form documents all of your closing costs and is final. Federal law requires mortgage lenders to provide loan applicants with an initial Closing Disclosure of the closing costs at least three days, excluding Sundays and national holidays, before closing. The initial CD must be signed by the borrower at least three days prior to closing. Changes can be made to the initial CD up until closing.
Page three of the CD compares the loan estimate with the actual fees.
Closing Cost Comparison
Ask questions about what you are being charged. We can look at your loan estimate from any other lender and point out all costs to you. Brokers like Carolina Home Mortgage have different rules than banks. We will tell you how much we are paid and how much credit we can get for you. Banks are not required to share this information
Can I Get a No Cost Mortgage?
Zero-cost mortgages are not possible. You either pay the costs to close when you sign for your home loan or pay a higher rate and pay the costs to close over time.
We only recommend this option if you need a short-term loan. That’s because a higher rate, even a slightly higher rate, can add up over the life of a home loan. Make sure when you compare interest rates that you are also comparing the costs to close.