The Federal Housing Administration is an arm of the Housing and Urban Development Administration and provides insurance to lenders, not borrowers, in the event that the mortgage falls into default. While this privilege does not extend to borrowers, there are many advantages of FHA-insured home loans, particularly for borrowers who are recent homeowners, young families or new homebuyers. Finding the best FHA mortgage rates is fairly straightforward, but it is important to first determine some information about yourself, your finances and your credit.
Access tri-bureau credit reports for you and your spouse (or cosigner) from a reputable source like annualcreditreport.com. Purchase copies of your FICO scores as well. These numbers, which range from 350 to 850, will give FHA lenders a snapshot of your credit and borrowing history. Scores above 720 are excellent while scores below 600 are considered poor.
Calculate your income ratios as these will play an important role in your FHA mortgage application. To calculate your debt-to-income (DTI) ratio, divide the sum of your monthly debt payments (excluding costs for nannies, utilities and transportation) by the sum of your total monthly gross income. Many FHA lenders want to see DTIs below 45 percent. To calculate your disposable income, subtract your total monthly debt payments from your overall monthly net income. FHA lenders also want to make sure you have a solid cushion of income each month for childcare, miscellaneous expenses and entertainment.
Research FHA mortgage programs. The FHA itself is not a lender, but an insurance division of the Housing and Urban Development Department. Some lenders are FHA-approved while others are not. Most small local banks and credit unions will offer both conventional mortgage programs -- which conform to traditional Fannie Mae and Freddie Mac underwriting guidelines -- and FHA-insured mortgage programs. Use your financial preferences, personal banking connections, creditworthiness and income ratios to narrow your search to two or three lenders.
Contact these two or three lenders to schedule meetings to review FHA-insured mortgage options. Be clear with the lenders that, at this time, you do not wish to file a formal mortgage application, but rather that you are merely fact-finding.
Review all programs from these lenders that offer FHA insurance. Often these programs will feature advantageous terms for those with imperfect credit, lower income and lower assets than well-qualified mortgage customers. These institutions are often more inclined to take credit risks on FHA loans, as they are federally insured.
Choose an FHA mortgage program and rate based on these meetings and provide your loan officer with two recent pay stubs, two years of Form W-2s and two years of tax return. This will help complete your mortgage application and ensure that your underwriter can easily review your qualifications.
- George Doyle/Stockbyte/Getty Images