Shopping for an FHA-Insured Loan
After you have found the home you want to buy, you should call various lenders listed under "Mortgages" in the Yellow Pages or visit www.hud.gov/ll/code/llplcrit.html to find the lender offering the best terms.
The costs associated with a loan can vary significantly from one lender to another. It pays to comparison shop for a mortgage.
The most important factors to consider in comparing loans are:
- Interest Rate
- Discount Points
- Closing costs and other fees, such as charges to originate the loan, commitment fees to "lock in" the mortgage terms you and the lender have agreed to for a certain period, and mortgage insurance premiums (MIP).
- Annual Percentage Rate
All of these factors are negotiated between you and your lender. HUD does not establish minimum or maximum amounts for the interest rate, discount points, or most processing fees you pay your lender.
Interest Rate
The interest rate a borrower pays for the mortgage is negotiated between the borrower and the lender. Interest rates fluctuate daily, depending on conditions in the mortgage market. It is always a good idea to check with several mortgage lenders to make sure you are getting the best interest rate available.
The following chart shows how the principal and interest on your mortgage will vary according to the interest rate.
| Monthly Payment for Principal and Interest on a 30-Year Fixed Rate Level Payment Mortgage | ||||
| Mortgage Amount |
Interest Rate | |||
| 7.0% | 8.0% | 9.0% | 10.0% | |
| $50,000 | 333.00 | 367.00 | 402.50 | 439.00 |
| $60,000 | 399.60 | 440.40 | 483.00 | 526.80 |
| $70,000* | 466.20 | 513.80 | 563.50 | 614.60 |
| $80,000* | 532.80 | 587.20 | 644.00 | 702.40 |
| $90,000* | 599.40 | 660.60 | 724.50 | 790.20 |
| $100,000 | 665.30 | 734.00 | 805.00 | 877.57 |
| $110,000 | 732.00 | 807.14 | 885.08 | 965.33 |
| $120,000 | 798.36 | 881.00 | 965.55 | 1,053.09 |
*The maximum loan limits are adjusted annually. Check with your lender or visit HUD's Website at https://entp.hud.gov/idapp/html/hicostlook.cfm.
Initial Investment (Down payment)
The borrower's initial cash investment is the difference between the amount of the mortgage and the total cost of the home. The total cost includes the purchase price plus closing costs, but it does not include prepaid items that you have to pay at settlement, such as real estate taxes and hazard insurance. Most FHA programs require the borrower to invest a minimum of three percent of the total property cost.
Discount Points
Lenders can charge discount points to borrowers. A point is $1 for every $100 of the mortgage amount. Points are charged when the interest rate is lower than the yield required by investors who buy mortgage securities. (Yield is the ratio of investment income to the total amount invested over a given period of time.) Securities are "packaged," usually in portfolios of $1 million dollars or more, and bought and sold in the financial markets. This creates additional mortgage money to lend to other homebuyers.
The numbers of points charged varies in different places at different times and among different lenders.
Discount points for an FHA-insured mortgage may be paid by homebuyer, the builder of the house, or the person selling the house. Discount points may not be financed as part of the mortgage amount (unless you are refinancing your mortgage and you have sufficient equity in the home to cover the points).
HUD does not control the number of points you agree to pay your lender. HUD does not set the points that a lender may require, and HUD does not receive any of this money.
Closing Costs and Prepaid Items
When your loan is finalized, you will have to pay closing costs. These fees may include a lender's service charge or origination fee, cost of the title search, fees for preparing, notarizing, and recording the deed and the mortgage, and other items. You will also be asked to make payments in advance for such items as taxes, property insurance, and interest to the end of the month.
Certain closing costs, such as recording fees and taxes, title examination, and credit reports, may be paid by the seller, or they may be shared between the borrower and the seller, depending on the terms of the sales contract.
The Real Estate Settlement Procedures Act (RESPA) requires that your lender give you an information booklet and a Good Faith Estimate on your closing costs within three days of receiving your written loan application. RESPA also requires that at closing or shortly afterward, you must receive a Uniform Settlement Statement , which is a permanent record of all the final settlement charges. You are entitled to review the Settlement Statement one business day before you close on your loan.
Origination Fees
Lenders may charge a service charge (called an origination fee) when you submit your mortgage application. In most cases, this charge cannot exceed one percent of the mortgage amount. However, if you are buying and rehabilitating your purchase under the Section 203(k) Program, a lender can charge an additional $350 or 2.5 percent of the portion of the mortgage that is escrowed for the rehabilitation to cover the cost of administering the rehab funds.
Commitment Fees
The lender may charge a fee to "lock in" the interest rate, number of discount points, and other terms you have agreed to, or to limit the extent to which the terms may be changed. Lenders may agree to offer the loan terms for a definite period of time (30 days, 60 days, 90 days, etc.), or they may refuse to do so. The terms of your commitment agreement will determine to what extent, if any, the interest rate and discount points may change before your loan closes. Any increase in the number of discount points or a one percent increase in the interest rate requires that your mortgage application be reprocessed.
Mortgage Insurance Premium
HUD charges a premium to insure mortgages. The premiums are used to pay claims to lenders when a borrower defaults on an FHA-insured mortgage.
Most borrowers with FHA-insured mortgages currently pay an up-front and annual mortgage insurance premium (MIP). The up-front MIP can be financed into the mortgage. Your lender can provide you with more information about MIP charges.
Annual Percentage Rate
The Truth in Lending Act requires lenders to disclose to borrowers the annual percentage rate charged on a mortgage to finance the purchase of residential real estate. The annual percentage rate is calculated by adding the interest rate, the discount points, the initial service charge, the premium paid to insure the mortgage, and certain other charges collected by the lender. The Truth in Lending Act is administered by the Board of Governors of the Federal Reserve System.
Your monthly payment will be determined by the amount of your mortgage, the interest rate, and the length of the loan. A longer mortgage term will lower your monthly payment, but it will increase the total amount of interest you pay. For example, if you borrow $50,000 with an interest rate of 10 percent, your payment to principal and interest will be:
| Monthly | Term | Total Payment |
| $537.50 | 15 years | $96,750 |
| $439.50 | 30 years | $158,040 |
Applying for the Loan
When you have selected a lender, arrange a meeting with the loan officer to fill out the application forms. At the interview, you will have to provide the lender with your most recent bank statement and pay stub, picture identification, and proof of your social security number. You will also have to pay fees for an appraisal and a credit report.
The lender will take care of processing the loan for FHA insurance and will arrange to close the loan.
Many lenders are authorized to approve mortgage applications without submitting any paperwork to HUD. These companies are called Direct Endorsement lenders. Most FHA-insured loans are handled by these lenders. In some cases, however, HUD reviews information submitted by the lender and determines whether the property and the borrower are acceptable risks for an FHA-insured mortgage. Regardless of the type of loan you select, you will deal only with the lender, and the lender will handle all transactions with HUD.
