FHA 5/1 Adjustable-Rate

Mortgage Loan

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Lower Payments Now, Flexibility Later

The FHA 5/1 ARM offers a fixed interest rate for the first five years, after which it adjusts annually. This mortgage is secured by the Federal Housing Administration (FHA) and provides flexibility and affordability at the start of your mortgage journey. It's designed for borrowers with lower credit scores and is ideal for first-time homebuyers who may not qualify for conventional loans.

Key Benefits

Lower Initial Rate

The initial rate of a 5/1 ARM is typically lower than any fixed-rate loan.

Rate Caps

Rate caps protect buyers from sudden and dramatic changes in interest rates and monthly payments.

Flexibility

Borrowers have five years to either sell their home or refinance the mortgage before rates adjust.

Lenient Credit Requirements

The credit score requirements are more borrower-friendly than those of conventional loans.

FHA 5/1 ARM Loan Information

The FHA 5/1 ARM is an Adjustable-Rate Mortgage backed by the Federal Housing Administration. It offers a fixed interest rate for the first five years, after which the rate adjusts annually. To better understand how this loan can fit into your homeownership plans, you can start by speaking to one of our seasoned experts.

How FHA 5/1 ARM Loans Work

Interest rates depend on the Secured Overnight Financing Rate (SOFR) index
Lender adds a margin to compute new rates after the fixed-rate period
Rate adjustments have annual and lifetime caps
Interest rate can increase by 1% annually and 5% over the life of the loan, or 2% annually and 6% over the life of the loan

FHA 5/1 ARM Loan Requirements

Occupancy: Only applicable to primary residences
Borrowing Limits (2024): $498,257 for one-unit properties, up to $1,149,825 in high-cost areas
Credit Score: Minimum 500 (higher down payment) or 580 (lower down payment)
Down Payment: 3.5% for credit scores 580+, 10% for scores 500-579
DTI: Generally 43%, some lenders may allow up to 50%
Employment Verification: Steady employment for the last two years
Mortgage Insurance: 1.75% of total loan amount at closing

Ideal Situations for FHA 5/1 ARM

Refinancing: Lower initial rate for 5 years before potentially converting to a fixed-rate mortgage
Short-Term Homeowners: Those planning to sell before the fixed-rate period ends
Financial Growth Expectations: Borrowers anticipating higher income within five years

Pros and Cons of FHA 5/1 ARM Loans

Understanding the advantages and disadvantages of an FHA 5/1 ARM loan can help you make an informed decision.

Additional Pros

Lower initial interest rate compared to fixed-rate loans
Rate caps protect against dramatic payment increases
Flexibility to sell or refinance before rate adjustments
More lenient credit requirements than conventional loans

Cons to Consider

Potential rate increases after the initial fixed period
Complex loan structure with various components
Risk of unaffordable payments if rates rise significantly
Limited to primary residences only
Requires mortgage insurance premiums

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FHA 5/1 ARM Loan FAQs

Everything you need to know about FHA 5/1 ARM Loans

What is an FHA 5/1 ARM loan?

An FHA 5/1 ARM (Adjustable-Rate Mortgage) is a type of home loan backed by the Federal Housing Administration. It features:

A fixed interest rate for the first 5 years of the loan
Annual rate adjustments for the remaining loan term
Lower initial interest rates compared to fixed-rate mortgages
More lenient credit requirements than conventional loans

This loan type can be beneficial for borrowers who plan to sell or refinance within the first 5 years, or those who expect their income to increase in the future.

How do the rate adjustments work after the initial 5-year period?

After the initial 5-year fixed-rate period, the interest rate on an FHA 5/1 ARM can adjust annually. Here's how it works:

The new rate is based on a financial index (typically the Secured Overnight Financing Rate or SOFR) plus a margin set by the lender.
There are caps on how much the rate can increase:
- Annual cap: Usually 1% or 2% per year
- Lifetime cap: Typically 5% or 6% above the initial rate
The rate can go up or down, depending on market conditions.

It's important to understand these adjustments and consider if you can afford potentially higher payments in the future.

What are the credit score requirements for an FHA 5/1 ARM loan?

The credit score requirements for an FHA 5/1 ARM are the same as other FHA loans:

Minimum credit score of 500: Eligible with a 10% down payment
Credit score of 580 or higher: Eligible with as little as 3.5% down payment

However, many lenders may require higher credit scores. It's also important to note that a higher credit score can help you secure better interest rates.

For the most up-to-date information on credit score requirements and to check your eligibility, speak with one of our mortgage experts.

Can I refinance an FHA 5/1 ARM loan?

Yes, you can refinance an FHA 5/1 ARM loan. Many borrowers choose to refinance before the initial fixed-rate period ends. Your options include: