Everybody’s looking to save a buck, especially on housing—one of the biggest expenses we have! The recent appearance of a new refinance program called “FHA short refinance” has increased interest in FHA mortgage loans. Read on for an FHA FAQ.
What Is an FHA Loan?
An FHA loan is a low down payment mortgage. The program was started during the Great Depression, to help would-be buyers without big down payments to buy homes and stimulate the economy. (Yes, everything does come back around again!)
How Does It Work?
To a mortgage bank, your risk of defaulting—not repaying the loan—rises as you put down a lower down payment. To reassure the bank, an FHA loan has you buy insurance, which is rolled into the cost of your loan at closing. Sometimes there’s a monthly surcharge as well. The insurance costs can be high—close to $5,000 on a $300,000 loan.
How Little Can I Put Down?
If your credit score is under 580, you’ll have to put down 10%. If you have a great credit score, you can put down as little as 3.5%, though I recommend that you never buy unless you can put at least 5% down. If you can’t save that much, I don't think now is the right time for you to buy a home.
How Big a Mortgage Can I Get?
The limits of the program are reset every year; for 2010, buyers in high-cost cities (think New York City or Los Angeles) can borrow up to $729,750.
Can I Get an Adjustable Rate?
Yes, the FHA offers adjustable rate loans (which are called Section 251s). However, I’d avoid them! I don’t think low down payment buyers need to take on that kind of risk—especially with fixed rates at their lowest point in history. Go for a fixed-rate loan, also known as a “203(b),” instead.
What’s an FHA Short Refinance?
If you already have a mortgage and you’re struggling to make your payments (the “short” part), an FHA refinance lets you refinance your loan into an FHA loan—presumably with more favorable terms.
For starters, you want to see if your loan is eligible. Unfortunately, loans backed by Fannie Mae and Freddie Mac aren’t eligible. So the first thing you need to do is to see if you’ve got one of those—by clicking this Fannie Mae lookup link.
What if I’ve Gone Bankrupt in the Past?
There is a “fresh start” aspect to FHA loans; if your recent credit has been perfect, you can get one two years after you’ve discharged a bankruptcy. However, let me say again: The economy has been terrible the last couple of years. You want a cushion for a rainy day. Wait until you’ve saved a 5% down payment before you buy a home.
Do I Go Straight to the FHA to Get an FHA Loan?
Nope, you have to go to a bank or other approved lender. However, the FHA site offers a place where you can search for an FHA lender.