There’s no doubt. Mortgage rates are going to continue its march forward and there’s little to no evidence of it going down. As housing inventory continue to stay in the low, creating an equivalent push of home prices up, it’s becoming harder and harder to find a home, and the mortgage for the needed financing.
The question then hangs: what are the best mortgage options available in this climate of rising rates?
We say you take a look at FHA loans.
If you are a first time home buyer, have low capital, or have less that stellar credit score, an FHA loan might be your best option.
What is an FHA loan?
The FHA program was established in 1934 in response to a damaged housing market due to the Great Depression. These helped provide adequate insurance to private mortgage lenders and help stimulate the market by making loans more accessible to people with low credit scores or those without enough money to pay for conventional loan down payments.
In a rising rate environment, taking a mortgage under the Federal Housing Administration could benefit you. How?
Low Down Payment
With an FHA loan, you are only required to put down a 3.5 percent down payment, compared to the 5 to 10 percent requirement in conventional mortgages.
Lower Mortgage Insurance
FHA loan MI rates remain lower than conventional mortgages – a median of .85 percent per year compared to a 2.81 percent annually in conventional mortgages.
Higher DTI Ratio Allowed
Your DTI or debt-to-income ratio measures how much of your income goes to your debts. The higher your DTI ratio is, the more of your income goes to debt payments. Conventional mortgages accept a maximum DTI ratio of 43 percent. Any score higher than this and you lessen your chances of getting a mortgage approval. But with an FHA loan, you can still qualify even if your DTI ratio is as high as 50 percent.
Seller Contributions Permitted
Closing costs can usually cost the borrower about 3 to 6 percent of the home price. That is why many try to negotiate the purchase price. Another way, however, of getting over this cost is for the seller to cover part of the closing cost.
An FHA loan allows the seller to pay up to 6 percent of the loan amount, instead of negotiating the home price.
Approval is Easy
Because the loan is insured by the federal government, a solid backer, lenders usually have less worry about the borrower defaulting on the loan. This gives FHA loan borrowers higher chances of approval.
You Can Take Over
And finally, one of the greatest advantage of FHA loans is that is it assumable. Meaning you can take over an FHA loan that is currently carried by your seller. If you meet the mortgage requirements, you no longer have to go through all the qualifying procedures to get a new mortgage. You also save thousands of dollars paid for the cost of closing.
Is an FHA loan right for you?