FHA mortgage

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New homebuyers have a wealth of mortgage options at their disposal. Perhaps the most recognized are FHA mortgages, which are backed by the government and allow homebuyers to put down as little as 3.5%.

With that in mind, Motley Fool analysts, Kristine Hartjes and Nathan Hamilton, discuss in the video below five crucial facts you should know about FHA mortgages. From credit score requirements to fees tacked on, you'll discover a handful of the most important facts to get started.

KRISTINE HARJES:

So there's a ton of information out there on the internet about FHA mortgages — and you might have heard of them as a really good low-cost option — but there's a lot of faulty information out there, too. So we're here today to try to clear it up and describe exactly what these are and things that you need to know before you consider one.

NATHAN HAMILTON:

Essentially today we'll cover five things you need to know about FHA mortgages. I would say these are more of the basics and not the in-depth details, but if you are looking at a home purchase [or] if you are a new homebuyer, this is definitely a good place to start.

So number one is an FHA mortgage. You can get a mortgage through FHA with as little as 3.5% down which, if you compare it to a bank, is say 20%.

KRISTINE HARJES:

Right, and so that is a reason that a lot of people will opt for this type of loan, because banks could perceive you as a little bit riskier if you're not putting as much down up front. And so if you don't have as much to put down, then the FHA is there to potentially give you a mortgage anyway.

NATHAN HAMILTON:

And at a competitive rate. The more you're perceived as a risk to a lender, typically your rate is increased, and that's what the FHA mortgage is for.

KRISTINE HARJES:

Exactly. So what else do we need to know about them?

NATHAN HAMILTON:

You're going to need to have at least a 580 credit score. The average American is just under 700. Even at 580, if you are at that level, do realize that it is still going to be difficult to get a mortgage. But if you look at the official details from FHA, that's where you're going to be, at 580, to get that 3.5% down mortgage.

KRISTINE HARJES:

Great. And what about the debt-to-income ratio?

NATHAN HAMILTON:

Forty-three percent. So add up what your monthly debt payments are and look at the top line of your income. You want to be below 43% or lower.

KRISTINE HARJES:

And how does that physically apply to these FHA loans?

NATHAN HAMILTON:

So in terms of FHA loans, if you've got, say, $100,000 worth of income — if you are at that level [and] you are lucky enough to be there — and you have $43,000 worth of annual debt payments, that's where you would qualify.

KRISTINE HARJES:

OK, makes sense. And so is there any sort of special insurance that we need to know about with these loans?

NATHAN HAMILTON:

So with mortgages, if you're new to understanding them, if you are putting less than 20% down, you're normally hit with a fee (we'll call it that) which is called private mortgage insurance. The same thing happens with an FHA mortgage. You're going to be hit with essentially an up-front fee of 1.75% and then also a fee each month which is about 1% or lower of the actual mortgage.

KRISTINE HARJES:

How does that compare to PMI, private mortgage insurance, on a non-FHA loan?

NATHAN HAMILTON:

It is lower, but with the new presidency, there have been some changes. Rates were set to decrease even further for mortgage insurance, but that has been taken back.

KRISTINE HARJES:

Interesting. So we were going to mention five highlights of the FHA mortgages. What is the fifth and final one?

NATHAN HAMILTON:

How to get it. Essentially you just need to go through an approved lender. It may be through a bank or local credit union. It doesn't go through the government, so when you're talking with your mortgage lender, just ask [them if they provide] FHA mortgages.

KRISTINE HARJES:

So, folks, that's what you need to know if you are potentially considering an FHA mortgage. And if you're looking for even more information, you can always go to Fool.com/Mortgages to compare rates on FHA and other mortgages, and you can also receive a few free guides, such as "5 Tips to Increase Your Credit Score Over 800" and "11 Mortgage Essentials."

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