Types of FHA Mortgages: Which One Is Best For You?

Types of FHA Mortgages

The Federal Housing Administration (FHA) is one of two United States government agencies that guarantee several types of FHA mortgages made by individuals who wish to purchase a new home, undergo home improvement projects, or refinance an existing property.

General Types of FHA Mortgages

Understanding the differences between the types of FHA mortgages will help you make smart choices in choosing a suitable housing plan, based on your financial capability.

• Fixed Rate Mortgage – Can be considered the most theoretically simplistic loan scheme. For the duration of your fixed rate period, your monthly payments remain the same.
• Adjustable Rate Mortgage (ARM) – Also known as variable rate mortgages, these are loans with interest rates that rise and fall depending on the present interest rates. Initial rates of ARMs are typically lower while the risk of higher future rates is shared between you and your lender.
• Graduated Payment Mortgage (GPM) – You make lower loan payments during the first few years. The payments gradually increase in the succeeding years. The premise of GPMs is that your financial capacity increases in the subsequent years.
• Energy Efficient Mortgage (EEM) – Utilized by homeowners who want to add “green” or energy-efficient features to a new home or to a refinanced one.

Graduated payment and adjustable rate mortgages have a varying interest rate in order to counterbalance the effects of inflation.

FHA Down Payment Rules

Down payment requirements for FHA loans don’t necessarily vary from state to state. However, their terms can vary depending on the lender’s understanding of your circumstances.

• FHA loans require you to provide a down payment of 3.5% on newly-purchased home loans. First time homeowners are eligible for the 203(k) scheme of payment: 3.5% down payment and 96.5% financing.
• The majority of your added costs (i.e. closing costs and funding fees) can be included in your loan.
• Lenders may judge your credit worthiness based on current circumstances. Some authorized FHA lenders may even push for a higher down payment.

You cannot expect similar terms from each lender; however the FHA loans for first-time homeowners have a down payment rule that applies to all states. You must carefully review the terms of every lender you consider.

Cash Reserve Requirements

Lenders are taking more stringent steps in approving mortgages. There are some requirements beyond federal and state disclosures that you may need to look into.

• Your credit scores should be at least 580 to qualify for FHA loans.
• Your debt-ratio, the ratio between your earnings and debt expenses, must be below 45%. This means that if you end up spending 45% of your monthly income to pay for debts, you might have a problem getting a housing loan.
• Lenders may also be concerned with your current employment status to see if you have the capacity to cover your loan dues.
• Your financial documents will also be thoroughly reviewed. Some lenders even require tax records.
• Lenders may also assess your cash reserves. Cash reserve requirements are considered as security cushions in the event that you experience a financial setback and are generally a strategy to avoid future foreclosure.

These days, lenders may ask you for more requirements when filing for an FHA loan. You may be requested to present your credit score, financial documents, and proof of available cash reserves, regardless of the types of FHA mortgages you are applying for.