FHA loans are a fantastic option for first-time borrowers to purchase a home. You can put down as little as 3.5% and the closing costs are included in the loan, or up to 6% can be covered by a seller concession. Many lenders will accept FICO scores of 600 or even lower and a DTI (Debt to Income ratio) of up to 50%, 5% higher than that of most conventional loans. Because of the higher risk to the lender, there's a downside. PMI is higher with FHA (.85% added monthly) than with a conventional loan and there's a 1.75% PMI pre-payment fee added to closing costs. Also going forward, the LTV is based on the original loan amount, not the current value of your home. It takes roughly 11.5 years to remove PMI from an existing FHA mortgage. There are solutions.
After 210 days, you can refinance out of an FHA and into a conventional mortgage, where the monthly payment can have as little as half the PMI and there's no upfront PMI fee. All that you would pay is the closing cost. In addition, when your house's value has increased and your LTV (Loan to Value) is 80% or lower, you pay no PMI and could save hundreds of dollars a month by refinancing.
A couple of traps to avoid. 1. If this isn't your forever home and you see yourself moving into something else in a few years, have your mortgage broker compare the cost of the loan to the expected PMI savings over that period of time (I do this automatically. I've turned down several refis from HuntWA members because the numbers didn't show an advantage for the borrowers). 2. If your credit is below 700, you need to work on it and fix the items listed as negative reporting. You may work to carry a smaller % balance on your credit cards or paying off unpaid collections can help. Unpaid accounts and or collections remain on your report for 7 years. A credit score of 780+ gets the lowest rates based on FICO. 3. Never default or stop paying government backed loans (FHA, USDA, VA, Student Loans). and 4. As with any mortgage, don't apply for new or higher credit when you know you'll be applying for a new mortgage.
Good luck with your new home purchase. If you have any questions about your present mortgage, PMI, or future purchase, I'd be glad to spend any time you need on the phone with you. No pressure and no unending phone calls.
John
360-771-1914
NMLS# 2014743
