Buying a Home With an FHA Mortgage When Rates Are Climbing
You do have options! They include negotiating with the seller or reviewing your choices with an FHA adjustable rate mortgage. In the time leading up to your loan application, you can also work to improve your FICO scores. Doing so can help you qualify for a better rate.
If you choose to negotiate with the seller, it may be tempting to ask them to lower the asking price. Will it be tough to sell the idea of a lower asking price? Consider asking for seller concessions to help you offset closing costs instead. It may be a way to reduce the amount of the loan without the trickier negotiation of price. But what is a seller concession?
HUD 4000.1, the FHA Lenders Handbook, says the seller is permitted to contribute up to six percent of the asking price toward your closing costs. In situations where you want lower total costs as an offset for higher rates, asking for this concession may be a more effective bargaining tool.
And if you and the seller agree, these concessions can free up money you would otherwise use to pay your closing costs. You could use that money in your down payment instead. Doing so means lowering your principal balance. It may reduce the financial impact of higher interest rates.
But that is not your only option to consider when trying to financially offset higher mortgage rates. An FHA adjustable rate mortgage (ARM) may include an introductory rate below the current fixed-rate mortgage options.
This would be in the form of a one-year intro period sometimes known as a teaser rate, but FHA ARM loan options also include teaser rates lasting between three and 10 years. You will need to find a participating lender willing to offer the longer ARM loan intro periods--not all do.
FHA ARM loans are not the best choice for all borrowers. If you come to this loan with an exit strategy for when the first rate adjustment occurs, you are in a much better position to make an informed choice about these loans.
There is also a good way to qualify for lower FHA loan interest rates, but much depends on what you do in the 12 months leading up to your FHA loan application.
Consider working on your FICO scores by establishing a 12-month-or-better record of on-time, every-time payments. The results can include an overall improvement in your FICO scores depending on how long you spend working on your payments.
It’s smart to also consider working on your debt ratio and trying to lower all outstanding balances on your credit card accounts. Doing so can go a long way toward improving your FICO scores, which in turn makes it easier for the lender to offer you a more competitive home loan interest rate.
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